Shanghai's commercial real estate market continues to favour tenants; retail leasing shows recovery

Shanghai, October 10, 2024 – As landlords in Shanghai's commercial real estate market continue to refine their leasing strategies, both office and retail leasing activities improved. According to Daniel Yao, Head of Research for JLL China, “The ongoing decline in rents has been a driving force behind cost-oriented relocations and upgrades in the overall office leasing sector.” Additionally, retail leasing is gaining momentum, driven by strong pre-leasing in new projects and proactive measures undertaken by landlords in existing ones. This quarter, retail leasing demand mainly came from affordable dining, sportswear, and trendy fashion brands, with brands that emphasize value propositions gaining popularity due to growing consumer rationality.

• Office Market: Decline in rents continued to trigger cost-oriented relocations and upgrades.

  
  
  

• Retail Market: Net absorption picked up amid improving leasing activity.

  
  
  

• Logistics Market: Supply pressure continued to keep vacancy at an elevated level.

  
  
  

• Residential Market: Solid demand from upgraders underpinned high-end sales.

  
  
  

• Investment Market: Office asset transactions led; retail properties showed strong attraction.

  
  
  

• Hotels Market: Backed by reviving tourism demand, Shanghai's hotel market performance stays steady.

  
  

In 3Q24, Rental adjustments fuel ongoing cost-driven demand, with net absorption rising to 152,460 sqm. “In the CBD, larger domestic occupiers, including insurance, law firms, and TMT companies, secured favourable terms,” said Jacky Zhu, Senior Director of Office Leasing Advisory, JLL Shanghai, “while MNC tenants remained conservative and opted for renewals.” In the decentralised submarkets, net absorption recorded 103,119 sqm. Diminishing rental disparity between some grade B and grade A projects continued to incentivise high-quality tenants to upgrade.

Two projects delivered 163,856 sqm in the third quarter. In the CBD, one new project of 91,161 sqm delivered to the Nanjing W. Rd. submarket. With this new completion, CBD vacancy rate continued to rise, up 0.6 ppts q-o-q to 16.2%. One project delivered 72,695 sqm of office space in the decentralised submarkets. Although leasing in new completion were slow, rental-driven leasing activities led the vacancy rate to decrease by 0.5 ppts q-o-q to 29.6%.

Rents continue to decline as tenant-favourable market conditions prevail. Supply pressure and limited demand driver caused overall market sentiment to remain conservative. Rents fell by 5.0% q-o-q in the CBD, landlords further adjusted their rental expectations to maintain occupancy and combat decentralisation. In the decentralised submarkets, rents fell by 4.3% q-o-q, triggering upgrade and decentralisation demand. It is worth noting that, in addition to rental concessions, some landlords are also offering to cover fit-out and other costs associated with relocation to attract tenants. Highly vacant projects and submarkets remain under pressure amid the supply pipeline over the forecast horizon.

In the third quarter, the net absorption of the Shanghai business park market recorded 37,000 sqm. Overall tenants continued to adopt cautious leasing strategies. According to Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory, “The overall market demand remained primarily driven by cost-conscious relocations or upgrades. Technology and internet companies, particularly in the integrated circuits sector, are key drivers, alongside increase in demand from government based industrial incubators and research institutions.” In terms of supply, a total GFA of 17,000 sqm of new completions were recorded this quarter. The newly completed project achieved a relatively strong pre-leasing result. The market’s overall vacancy rate decreased slightly by 0.2 ppts q-o-q, reaching 19.8%. Most landlords continued to adjust leasing strategies to attract tenants, resulting in a 3.9% q-o-q decline in overall rents to RMB 4.1 per sqm per day.

In 3Q24, Shanghai’s retail leasing momentum further improved, with overall net take-up reaching 343,500 sqm. This growth can be largely attributed to the high pre-leasing rates in new projects and proactive measures undertaken by landlords to address vacancies in existing malls. According to JLL East China Head of Retail, Neo Huang, “New leases predominantly came from affordable dining, sportswear, streetwear brands, local designers' brands, and collectible toys stores.” Moreover, a shift towards more rational consumer behaviour aided brands that offer 'value for money' products to gain popularity.

Four new projects opened in 3Q24, delivering a combined retail GFA of 337,000 sqm to the decentralized area. The new projects achieved smooth pre-leasing progress with commitment rates ranging from 70 to 100%. No new supply was recorded in the prime area this quarter. The prime market vacancy rate decreased from 9.2% to 8.0%, while the decentralised market vacancy rate declined from 13.2% to 12.7% as landlords offered increased flexibility to attract and retain brands.

Landlords continued to prioritize occupancy this quarter by offering more rental concessions. Average ground floor rents in the prime area declined 1.3% q-o-q to RMB 46.1 per sqm per day in 3Q24. The decentralised rents dropped 2.0% q-o-q to RMB 16.3 per sqm per day in 3Q24.

As the younger generation is becoming the main consumer group of many popular products, trendy fashion brands, sportswear and equipment, ACG products, and collectible toys are expected to continue to gain popularity, driving active store expansion.

Leasing demand was relatively quiet in 3Q24, and overall sentiment remained subdued. The slow recovery in consumption led tenants to make cautious leasing decisions, with some opting to downsize or surrender their spaces. Overall vacancy recorded 25.5% in 3Q24 reflecting the subdued demand and the introduction of new supply. Submarkets experiencing substantial supply influx bore the brunt of the pressure.

The persistence of supply waves continues, with over 1.1 million sqm of new space delivered during the first three quarters of 2024. In the quarter, a project with a total GFA of 118,900 sqm was completed in the Fengxian submarket. Richard Huang, Senior Director of Logistics & Industrial for JLL China remarked, “While west Shanghai submarkets such as Jinshan and Qingpu remained primary focal points for supply pressure, the wave of supply has extended to encompass other submarkets. For instance, Fengxian submarket anticipates the completion of another project by the end of 2024.”

Overall rents declined by 2.2% q-o-q on a like-for-like basis, reaching RMB 1.48 per sqm per day in 3Q24. Given the heightened vacancy level, landlords of new projects are adopting aggressive rent setting strategies while those of existing projects are becoming increasingly flexible in lease negotiations.

Reduced new launches coupled with seasonal effects led primary sales volume to fall 16.8% q-o-q to 1.57 million sqm in 3Q24. Pre-sales performances further diverged across new projects launched this quarter, with good-value projects in prime locations remaining popular among homebuyers. Homebuying demand for new high-end projects remained buoyant in 3Q24. Projects located in prime locations such as Xuhui Bund and Huangpu Bund were particularly well received. A total of 947 high-end units were registered as sold in 3Q24, with more sales expected to be reflected in the following quarter.

With many new projects launched in the previous quarter, the primary home supply in 3Q24 totalled only 1.68 million sqm, down 26.2% q-o-q. High-end supply remained ample this quarter as twelve projects with a total of 1,610 units were launched for sale, up 422.7% y-o-y. The average prices of those newly launched high-end projects ranged between RMB 128,600 per sqm and RMB 210,000 per sqm.

Looser price caps allowed average primary prices to edge up 0.3% q-o-q to RMB 143,700 per sqm in 3Q24. However, average secondary prices fell 3.9% q-o-q to RMB 142,900 per sqm amid continued homebuying caution in the secondary market this quarter.

“Shanghai's high-end segment will continue to be supported by solid demand from upgraders,” said Sherril Sheng, Research Director for JLL China Residential Sector, “The series of new policies introduced at the end of September, including further relaxation of home purchase restrictions on non-local residents, optimization of housing mortgage policies, reduction of down payment ratios, adjustments to value-added tax exemptions, among others, will effectively help expand demand and further boost market confidence.”

In the third quarter of 2024, the Shanghai investment market maintained its activity, completing 28 transactions with a total transaction volume of RMB 17.26 billion, representing a 14.3% increase compared to the previous quarter. The transactions are predominantly driven by smaller projects, with 79% of the deals being under RMB 1 billion in deal size. With few investment activities driven by foreign and domestic insurance institutions, most investors remain cautious.

Office assets transactions dominated the market, accounting for 34% of transaction volumes and 46% of deal counts. They attracted a diverse range of investors, including corporate entities from various industries and government platforms. Retail properties also exhibited strong appeal, claiming a 24% share of the total transaction volume in the quarter. Foreign institutions actively pursued stable cashflow projects, while high-net-worth individuals strategically invested through channels such as foreclosure auctions. Other assets such as mixed-use (17%), business parks (12%), and hotels (6%) are also active, contributing to a diversified investment sentiment.

Investment purpose-driven transactions dominated the market, representing 72% of the total transactions, while end-using projects accounted for 28%. Core districts like Xuhui, Jing'an, and Huangpu saw the concentrated trend, accounting for nearly a third of the total transaction volume, highlighting the strong demand for assets in prime locations. Offshore investors showed a notable return, with their share of investment increasing from 3% in the second quarter to 37% in the third quarter. Private enterprises and high-net-worth individuals demonstrated a significant surge in investment enthusiasm for Shanghai, accounting for 57.6% of total investment and fuelling market activity this quarter.

" As the Fed implements interest rate cuts and China’s central bank reduces interest rates and reserve requirements, these measures boost market growth." said Ling Sun, Head of JLL Capital Markets, East China "The real estate market is poised to benefit further, and we expect more large institutional investors to return to the market, pushing Shanghai's transaction volume to new heights."

Shanghai's overall hotel market performance remained stable as the domestic and international tourism market continued to gain traction. According to the Shanghai Bureau of Statistics, as of August, the city's star-rated hotel room occupancy rate increased by 2.3 percentage points year-on-year, the average room rate increased by 2.3% year-on-year, and the revenue per rentable room increased by 6.2% year-on-year, which has basically recovered to the pre-epidemic level.

A total of 2,520 new high-end and above hotel rooms were added in the first three quarters of 2024, with approximately 990 rooms expected to enter the market in the fourth quarter. Representative hotel projects that opened in the third quarter include the rebranded Alila Shanghai (188 rooms), Hilton Shanghai City Center (381 rooms) and voco Shanghai Zhangjiang (281 rooms), as well as Crowne Plaza Shanghai Ice World (370 rooms) located next to the world's largest indoor skiing resort, Shanghai Yoyo Snow Ice World, and voco Suites Shanghai Hongqiao Business District Hotel (131 rooms) in Shanghai's Hongqiao Business District.

“With a series of initiatives by the Shanghai Municipal Government to stimulate consumption of services, including the launch of the new version of the city's travel card, the Shanghai Pass, Shanghai's overall hotel market performance is expected to achieve a sustained and stable development,” said Adela Zu, Vice President, JLL Hotels & Hospitality Group Greater China.

As 2024 draws to a close, hotel operators and owners continue to focus on the current year's performance and are looking ahead to 2025. Based on 621 questionnaire responses from hotel operators and owners in Mainland China, JLL is cautiously optimistic about the overall performance forecast, as total hotel revenue and GOP are expected to show slight growth. More emphasis is placed on the hotel talent pool and development path, personalized development of F&B and MICE, capital expenditures to enhance guests' stay experience and sustainable development.