Shanghai office recovers; sportswear, toys drive retail revival

Shanghai, January 9, 2025 –Cautious tenant leasing sentiments characterised Shanghai’s commercial real estate market in 2024. According to Neo Huang, Senior Director of Office Leasing Advisory for JLL Shanghai and Head of Retail for JLL East China, “Rent concessions and subsidies by landlords are encouraging tenants to relocate or upgrade their office spaces, largely driven by the pursuit of improved cost-efficiency.” In the retail market, active leasing demand comes from tenants in sportswear, collectible toys, anime, and pet products, as products or experiences that combine cost-effectiveness with emotional appeal are increasingly favoured by consumers. Under loosening housing policies, the high-end residential market revives, underpinned by strong upgrading demand, reflecting consumers' aspirations for high-quality living spaces.

• Office Market: Cost-driven demand persist amid declining rents and cautious sentiments.
  
  
• Retail Market: Leasing demand from sectors such as sportswear and collectable toys remains active.


• Logistics Market: New supply record in 2024 contributes to rising vacancy rate.
  
  
• Residential Market: Eased policy conditions and solid upgrading demand underpinned high-end sales in 2024.
  
  
• Investment Market: Office, rental housing, and retail assets are now the top three investment choices; transaction structure has further evolved.
  
  
• Hotels Market: Backed by reviving tourism demand, Shanghai's hotel market performance improves.
  
  

In 4Q24, rental decline and increased incentives continued to drive upgrading demand. Net absorption recorded 149,600 sqm in 4Q24 and totalling 476,300 sqm for the year. “The decline in rents triggered cost-driven demand in both the CBD and the decentralised market, while some larger occupiers secured favourable terms and upgraded to new offices,” said Joseph Wang, Senior Director of Office Leasing Advisory for JLL Shanghai. CBD net absorption climbed to 78,800 sqm in 4Q24, while the decentralised market recorded 70,700 sqm. The narrowing rental disparity across Grade A and Grade B projects incentivised tenants across different industries to optimise their leasing strategies.

The fourth quarter of 2024 saw 138,800 sqm of new supply enter the market, contributing to a total annual new completion of 661,600 sqm. One project, which delivered 122,400 sqm, entered the CBD market, pushing the vacancy rate up to 16.4%. This marks an increase of 0.2 ppts q-o-q and 1.5 ppts y-o-y. As a result, the vacancy rate decreased by 0.6 ppts q-o-q and 0.8 ppts y-o-y to 29.0%, mainly due to cost-driven demand and relatively low supply resulting from project delays.

Rents remained in decline amid competition for tenants. CBD rents declined by 3.7% q-o-q and 15.3% y-o-y. Landlords were flexible in both new leasing and renewal negotiations to maintain occupancy levels. In the decentralised market, rents dropped by 4.1% q-o-q and 13.8% y-o-y. Large available spaces continued to put leasing pressure on the market and intensified market competition, pushing landlords to offer more appealing rental incentives. It is worth noting that, tenants are increasingly inclined to leverage these conditions to secure favourable leasing terms, including rental reduction, extended fit-out periods, CapEx reimbursement, etc.

In the fourth quarter, Shanghai’s business park market net absorption recorded 103,400 sqm, bringing the annual total to 316,300 sqm. This increase comes amid a recent influx of high-quality projects and market rental adjustments, prompting more tenants, including foreign corporate headquarters, to reassess their leasing strategies. According to Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory, “Cost-driven relocations or upgrades remained the primary demand. Technology and internet companies were the key demand drivers, particularly in the integrated circuits, internet, and gaming sectors, while demand from government-backed industrial incubators and research institutions remained active.” The completion of four projects was recorded this quarter, with a total GFA of 257,000 sqm and a total annual new completion of 941,900 sqm. The large new supply pushed the overall vacancy rate up by 0.9 ppts q-o-q and 4.3 ppts y-o-y to 20.7%. The overall market rents continued to face downward pressure, influenced by tenants’ cautious sentiments and the large supply influx in the short term. Overall rents declined by 3.7% q-o-q and 10.6% y-o-y to RMB 4.0 per sqm per day.

Net take-up in Shanghai's urban area reached 157,000 sqm in 4Q24. The total net take-up for the year recorded at 451,400 sqm, reflecting a slowdown compared to 2023. According to Neo Huang, Senior Director of Office Leasing Advisory for JLL Shanghai and Head of Retail for JLL East China, “New leases in 2024 primarily came from sportswear, domestic fashion brands, collectable toys and lifestyle products, ACG products, immersive experience, art and culture exhibitions, pets-related service and products, affordable dining, bakery, and beverage.”

Three prime projects and four decentralised projects contributed a combined retail GFA of 287,000 sqm to the Shanghai retail market. In 2024, three prime malls and nine decentralised malls delivered a total retail GFA of 714,000 sqm. Prime vacancy rate rose by 1.2 ppts to 9.1% in 4Q24, primarily due to tenant adjustments in several prime projects. Meanwhile, the decentralised vacancy rate rose by 0.4 ppts q-o-q to 13.1% in 4Q24, attributed to pre-leasing challenges faced by new projects.

Rents continued to decline as landlords offered greater rental concessions to retain and attract tenants. In 4Q24, average ground floor rents in prime area dropped by 2.8% q-o-q to RMB 44.2 per sqm per day, while the decentralised area rents fell by 3.7% q-o-q to RMB 15.5 per sqm per day. For the year, average prime rents declined 5.2% y-o-y, while decentralised rents decreased by 7.5% y-o-y. The decentralised area continued to face challenges in 2024 due to increasing market competition.

We expect project performance to further diverge. Sportswear, trendy fashion brands, ACG products, and collectible toys are expected to remain popular, driving active store expansion.

Demand sentiment was subdued in 2024. Tenants' widespread cautiousness led to diminished leasing activities due to muted consumption recovery. Although net absorption improved in 4Q24, recording 139,000 sqm, the full-year result totalled only 20,000 sqm. The vacancy rate continued to increase, reaching 25.7% in 4Q24 amid 214,890 sqm of new supply. Although local 3PL firms continued to take on new leases, the overall subdued sentiment during the year resulted in an extended timeframe for landlords to lease out large vacancies.

In 4Q24, three projects reached completion in Jiading, Fengxian, and Songjiang, bringing the full-year total new supply to a record 1.35 million sqm. Richard Huang, Senior Director of Logistics & Industrial for JLL China remarked, “While supply was concentrated in west Shanghai submarkets in 1H24, the wave spread to submarkets such as Fengxian in 2H24. Two projects were completed in Fengxian in 2H24, accounting for 15% of the space delivered over the year.”

Overall rents decreased by 4.2% q-o-q on a like-for-like basis to RMB 1.42 per sqm per day, reflecting a 7.8% decline over 2024. The elevated vacancy level intensified the competition among landlords, prompting aggressive pricing strategies to fill vacancies.

In November, Shanghai further eased its housing policies by eliminating the distinction between ordinary and non-ordinary housing and reducing tax levies for home transactions. Coupled with September's easing of HPRs, homebuying sentiment showed signs of improvement in 4Q24. Overall primary sales rose 13.9% y-o-y in 4Q24, totalling 7.12 million sqm for the year, down 22.8% y-o-y due to reduced new supply. However, solid upgrading demand led high-end sales to reach 1,937 units in 4Q24 and 5,711 units for the year, an increase of 85.8% y-o-y.

The pace of new project launches remained slow in 4Q24, with new supply amounting to 2.07 million sqm this quarter, down 37.3% y-o-y. Annual new home supply totalled 7.71 million sqm, a decline of 24.9% y-o-y. In 4Q24, 13 new high-end projects launched 1,861 units for sale, a 15.6% q-o-q increase. Average prices ranged from RMB 115,000 per sqm to RMB 176,000 per sqm. For the year, Shanghai's total high-end supply reached 6,704 units, up 138.9% y-o-y.

In 4Q24, Shanghai’s average high-end primary price edged up 0.3% q-o-q to RMB 143,300 per sqm. Meanwhile, supported by improved sales momentum, average high-end secondary prices experienced a narrower decline, falling 3.6% q-o-q to RMB 137,700 per sqm.

“Recent policy moves, including relaxed HPRs, eased mortgage rates, and lower transaction tax rates, have helped underpin home sales momentum. However, further policy easing may occur depending on the continuity of this market recovery,” said Sherril Sheng, Research Director for JLL China Residential Sector. With current policies, high-end primary prices are expected to rise further, while high-end secondary prices are expected to see narrower declines as Shanghai's secondary home sales see a steadier recovery going forward.

In 2024, the Shanghai investment market recorded 103 transactions with a total transaction volume of RMB 57.35 billion. While this represents a 38% decrease in volume compared to 2023, the number of transacted deals increased by 12%. This year, transactions were predominantly driven by small-scale projects, with 81% valued at less than RMB 1 billion. Under current market conditions, a variety of landlords, including private enterprises and institutions, have prioritized finalizing the transaction instead of sales price, positively impacting market activity. In 2024, high-net-worth individuals and a diverse range of enterprises have become more active, while most institutional investors remained cautious. The conservative decision-making by many investors has impacted both the scale and trend of market transactions.

Office assets remained the standout asset class in 2024, accounting for 40% of the total transaction volume and 45% of the total number of transactions. Office assets has attracted interest from enterprises across various industries, government platforms, and high-net-worth individuals. In contrast to 2023, when self-use buyers dominated the office investment market, one-third of transactions in this asset class in 2024 were for investment purposes, reflecting optimistic market expectations regarding the future asset value of Shanghai.

People’s heightened awareness of living conditions has facilitated continued investment into alternative sectors such as rental housing. In the 2024 Shanghai investment market, rental housing emerged as a mainstream asset type, representing 14% of the total transaction volume and 17% of the total number of transactions. Furthermore, the market displayed diversification in asset types, with the top three by transaction volume being office (41%), rental housing (14%), and retail (13%).

Regarding sources of funding, the proportion of foreign investment in transactions increased from 6% in 2023 to 12% in 2024, indicating a relatively positive trend of recovery. In 2024, foreign investment mainly focused on asset types such as retail properties and rental housing. Regarding investment purposes, 70% of foreign investments in 2024 were for investment purposes, while 30% were for self-use purposes. The investment-dominant trend reflects investors' confidence in the appreciation potential of Shanghai's assets.

Ling Sun, Head of JLL Capital Markets East China stated, "As landlords become more accepting of providing price concessions to drive investment activity, transaction prices are becoming more reasonable. Following a period of market volatility and price adjustments, more projects are expected to be put on the market and be transacted in 2025."

Shanghai's overall hotel market performance has shown improvement as both domestic and international tourism markets continue to gain traction. According to the Shanghai Bureau of Statistics, as of November, five-star hotel room occupancy rate increased by 1.3 ppts y-o-y in Shanghai. Additionally, the average room rate increased by 2.6% y-o-y, and revenue per available room increased by 4.6% y-o-y, bringing these figures very close to the pre-pandemic level.

In 2024, a total of 4,002 new upscale and above hotel rooms entered the market. Notable hotel projects that opened in the fourth quarter include Cordis SeaWorld (274 rooms), Hilton Hongqiao Airport (300 rooms), and the first Vignette Hotel (272 rooms) located next to the world's largest indoor skiing resort in Lingang.

“A package of new measures recently unveiled by the Shanghai Municipal Government to stimulate services consumption, coupled with the influx of international travelers, may contribute to the continued stable growth of Shanghai's overall hotel market going forward,” said Tao Zhou, Managing Director, Head of JLL Hotels & Hospitality Group Greater China.