News release

Office market demand faces challenges in the near term; Grade A warehouses play a key role amid novel coronavirus outbreak

JLL’s preliminary assessment of the viral outbreak’s impact on commercial real estate in Eastern China

February 12, 2020

Shanghai, February 12, 2020 – The novel coronavirus pneumonia (COVID-19) outbreak is an unexpected event that will have a material impact on the commercial real estate market in the near term. In the longer term, assuming the current coronavirus outbreak is contained in an effective and timely manner and paired with supportive government policies to rehabilitate the economy, the fundamentals of East China’s commercial real estate should emerge unaffected.

Office Market: Leasing activity curbed over the near term with lower market expectations

Leasing activity will be restrained until the coronavirus outbreak is fully contained. Combined with health and safety concerns, the extended Lunar New Year holiday will constrain site inspections and fit-out construction, forcing some firms to postpone their leasing activities. Firms facing lease expirations will be compelled to renew their leases, while others will experience difficulties with plans to relocate. Therefore, it is critical that landlords proactively communicate with tenants in facing these challenges.

In addition to the general slowdown of economic activity, export-oriented manufacturing and trading businesses – along with retail service providers such as offline education and training businesses – will face pressure in the near term. That said, as manufacturing and trading businesses in East China’s key Grade A office markets have a domestic focus, the impact from the WHO’s recently declared public health emergency of international concern (PHEIC) will be limited. Biotechnology and pharmaceutical firms have experienced healthy growth over the past two years, and will see a further boost after the outbreak, giving a lift to their future office demand.

During the 2003 SARS epidemic, Shanghai’s office market benefitted from limited supply and a booming economy, allowing it to withstand a rental decline over 3 quarters before reverting to a growth trajectory. This time, as the market was already under downward pressure before the outbreak, rents are expected to decline further for the duration of the outbreak, and it could take longer for the market to stabilize than previously expected.

The current circumstances have led more enterprises to realize the importance of technology-empowered worker mobility, but traditional workspaces will not be replaced. Property management, particularly health and wellness features and technology enhancement will become important areas in which landlords can differentiate their offerings.

Small-to-medium enterprises will face increasing pressure amid reduced economic activity, which may put a strain on the overall leasing market. Some co-working operators might need to endure higher risk from such impact.

The WHO maintains confidence in China’s ability to contain the outbreak. With the prospect of follow-up supporting policies, firms will be able to resume productivity and begin making up for business lost during the outbreak.

Retail Market: Significant impact until outbreak is fully contained; Spotlight on importance of online and offline integration

The coronavirus outbreak will negatively impact the bricks-and-mortar retail market in the near term. Infection control measures such as avoiding public gatherings and extending the public holiday led retail turnover during the Spring Festival Golden Week to fall sharply short of expectations. Several landlords have decided to shorten malls’ opening hours, cancel promotional activities and shut down operations including restaurants, cinemas, gyms and entertainment venues. Consequently, both landlords and brands are facing greater revenue pressure. To relieve pressure on tenants, some landlords have decided to reduce or waive rents for one to two weeks. Meanwhile, we expect several projects are likely to postpone their openings this year.

Online sales channels help ease firms’ revenue pressure. With the public staying home during the outbreak, fresh food supermarkets have achieved strong sales, in particular those that have integrated online and offline sales channels. More retail and F&B brands also launched online channels and delivery services to compensate for losses from their physical stores, including some Michelin-starred restaurants and fashion retailers. Meanwhile, landlords also have been actively expanding online shopping channels for clients. Taking Hangzhou as an example, both high-end shopping centres and community shopping malls started utilizing online channels such as social networking platforms to connect customers and providing them a “cloud shopping” experience.

Customer sentiment is expected to remain cautious a bit longer even after the outbreak is contained, resulting in a lag in the stabilization of rents. That said, customers’ pent-up willingness to shop should gradually bring shoppers back to malls, contributing to the market’s recovery after the outbreak.

Logistics Market: Limited rental and demand impact for Grade A warehouses in Yangtze River Delta; rising opportunities in automation and cold chain logistics

Grade A warehouses have remained relatively resilient amid the outbreak due to the following factors: the expansion of online retail channels, the limited share of rents in businesses' overall costs and the rising demand of health and wellness–related products due to the coronavirus outbreak. While Grade A rents in some projects may fluctuate over the short term, the degree of impact will be low over the mid-to-long term. Export-oriented tenants may need to adjust their leasing and expansion strategies. The progression of the outbreak has resulted in people hoarding goods and has temporarily disrupted the flow of consumer products, which may negatively impact some warehouse tenants' cash flows and rental affordability. However, assuming the market’s fundamentals remain sound with the outbreak contained, leasing activity is expected to make a quick recovery.

While the logistics market has proven relatively resilient amid the outbreak, logistics demand in the Yangtze River Delta has experienced more moderate growth in recent years due to China's slower retail sales growth and the impact of major online players turning from the leasing market to self-built warehouses. That said, the outbreak has highlighted Chinese consumers’ booming demand for fresh food e-commerce and the pharmaceutical industry’s need for secure transport. As a result, cold chain and related technologies are expected to present new opportunities to logistics landlords and investors going forward. The outbreak also has made the logistics sector more aware of the importance of operational efficiency as well as welfare of employees. Greater implementation of automation and other smart technologies will enhance the development of China’s Grade A warehouse sector and create more investment opportunities going forward.

JLL’s survey from late 2019 indicates that logistics real estate developers and investors prefer key city clusters such as the Yangtze River Delta for their logistics property footprints. Compared to legacy facilities, Grade A properties can better enhance tenants’ supply chain efficiency with higher efficiency rates, better locations and greater compliance with regulations. JLL estimates Grade A properties account for only 5-10% of China’s total warehouse stock, indicating there is strong potential demand for upgrading from legacy facilities to higher-quality ones.

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion, operations in over 80 countries and a global workforce of more than 93,000 as of December 31, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit

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