Note: Prime Retail refers to the Urban market. *New Supply is inclusive of the Suburban market.
Upward trend in consumption stimulates demand recovery. Throughout the year, consumption experienced a shaky recovery with a narrowing trend in downward fluctuations. Starting in October, Beijing witnessed a new surge in consumption, significantly boosting market sentiment. Retail project leasing inquiries increased across the city, mainly due to retailers’ expansion plans for 2024. Existing vacant areas were efficiently destocked with no new supply introduced.
Demand absorbs by mature projects, and the vacancy rate hits a record low for the year. Delaying the market entry of five planned projects totaling 690,000 sqm until 2024 has resulted in no new supply being recorded in the fourth quarter. Postponement was primarily caused by the pre-leasing challenges, many retailers with expansion plans choosing to expand in mature shopping malls that have already been market-validated, thus avoiding the risks and uncertainties of newly opened projects. From an overall market perspective, the delayed introduction of new supply has eased pressure on existing projects. In this quarter, the market recorded a net absorption of 63,903 sqm. Both urban and suburban markets observed the lowest vacancy level since 2Q22, with the urban vacancy rate dropping by 0.4 ppts to 5.9%, and the suburban vacancy rate dropping by 0.8 ppts to 6.7%.
Absorption of existing vacancies drives rental increases. Projects with leading market performance achieved their annual rental increase expectations earlier compared to others. Most of top projects located in the urban market completed their major rental adjustments in the second and third quarters of 2023 and drove up the rental level in surrounding projects. Consequently, the overall rent in the urban market saw a 0.6% q-o-q increase. In the suburban market, the steady absorption of vacant space, coupled with postponed project openings, provided landlords with the opportunity to raise rents in the quarter, resulting in a rental growth of 1.2%, up by 0.9 ppts q-o-q. “The rebound in leasing demand in 2023 has enhanced confidence among landlords in performance-leading projects, with rents expected to climb back to pre-pandemic levels in the next two years. Led by top projects, the average rent in the urban market in 2024 is expected to increase by 2.3% y-o-y,” said Ji Ming, Research Director for JLL North China.
Industrial
Demand was solid, yet one new completion contributed to a vacancy increase. Leasing demand remained stable, with several new leases of more than 10,000 sqm each completed in 4Q23. New leasing demand was mainly from supply chain companies, 3PLs and healthcare companies. However, as tenants became more rent-sensitive, slower leasing activity was observed in the BALP sub-market, which has the highest rents in Beijing. For supply, two new projects with a total GFA of about 166,000 sqm entered the market in 4Q23. However, absorption levels at the new projects diverged. One of the new projects was fully committed before it officially entered the market. The other new project recorded few pre-leasing deals due to its poor location, leaving the project with a relatively higher vacancy rate. Due to the weak performance of this new project, the overall vacancy rate increased by 1.1 ppts to 10.4% in 4Q23.
While the modest rental growth in 1Q23 brought the annual figure up to 0.4% at year-end, overall rents fell slightly by 0.6% q-o-q in 4Q23. Pressure from more rent-sensitive tenants and continued rental decline in surrounding areas of Beijing has pushed some landlords to adjust leasing strategies to attract and retain tenants this quarter. Landlords from higher-rent areas have shown a greater willingness to adjust rents and provide incentives.
“Rents are expected to fall in 2024,” said Mi Yang, Head of Research for JLL North China. “Beijing will continue to see a large amount of new supply entering the market from 2024 to 2025, which is expected to reach 2.09 million sqm, an expansion of two-thirds of the current market size. The supply pressure and increasing rent sensitivity of tenants are expected to impact landlord sentiment in 2024. Some landlords will further adjust leasing strategies to boost occupancy. We expect rents to fall at a modest pace in 2024.”
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