Shanghai’s net absorption saw a notable increase in the second quarter recording 115,700 sqm driven by leasing activities influenced by cost considerations. Stanley Jiang, Senior Director for JLL Shanghai Office Leasing Advisory stated, “In the CBD, tenants leveraged market opportunities to upgrade office quality by relocating to newer projects, while Cost-saving decentralisation trend continues.” In the decentralised submarkets, the influx of supply exerted downward rental pressure, prompting larger occupiers to seize the opportunities. Also, Cost-saving decentralisation trend continues with some companies originally located in suburban areas are capitalising on the narrowing rental disparity to relocate to decentralised grade A projects.

Four projects deliver 261,000 sqm in the second quarter. In the CBD, a new project with 40,400 sqm of space entered the Xintiandi submarket, generating significant pre-leasing and inquiries. However, a combination of decentralisation and small-scale terminations led to a 0.3ppts q-o-q rise in vacancy to 15.6%. In the decentralised submarkets, three projects reached completion totalling 220,700 sqm, intensifying market competition. The new completion offset the relatively active leasing observed in the decentralised submarkets and pushed up vacancy by 0.5 ppts q-o-q to 30.1%.

Rents further decline and are expected to remain in the downward cycle as the market competes for cost-driven relocations. The current market environment stimulates upgrade demand or flight to higher-quality decentralised projects, alongside the possibility of favourable renewal deals for some tenants. Some large-sized anchor tenants with expiring leases may also consider leveraging current market conditions to adjust their leasing strategies. Rent adjustments within the current market are expected to drive net absorption to gently recover.

In the second quarter, the net absorption of the Shanghai business park market recorded 178,000 sqm. The recent completion of high-quality projects and increased negotiation margin attracted some tenants to relocate and upgrade. Furthermore, relocation from some large-size tenants emerged after a lengthy and thorough decision-making process. “We are witnessing more tenants seizing opportunities to reassess their leasing strategies. Key drivers of demand include companies in the integrated circuits sector and those along the NEV industry chain. Additionally, demand from public incubators (a type of government platform) and research institutions increased as business parks have been essential vessels of industrial development.” said Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory. A total GFA of 237,000 sqm of new completions were recorded this quarter. The overall vacancy rate of the Shanghai business park market slightly increased by 0.1 ppts q-o-q, reaching 19.9%. Rental growth remained under pressure due to slow market recovery and a large supply pipeline. Overall rents fell by 2.0% q-o-q to RMB 4.3 per sqm per day.

Shanghai’s retail leasing momentum demonstrated a slight improvement in 2Q24, with overall net take-up reaching approximately 2,300 sqm. This is mainly contributed by the recovery in leasing demand, particularly within the prime areas. According to JLL East China Head of Retail Agency Leasing Neo Huang, “New leases primarily came from affordable dining, bakery and beverage, sportswear, fast fashion, local womenswear and discount stores.” Notably, leading sports brands continue to expand their presence in China, while an increasing number of niche brands made their debut in Shanghai.

One project opened in Shanghai's decentralised market - Xuhui Vanke Plaza, delivering a retail GFA of 90,000 sqm to the South Railway Station submarket. The prime market vacancy rate saw a slight decrease from 10.3% to 9.2%, while the decentralized market vacancy rate continued to rise from 12.5% to 13.2%. Mall performance showed further divergence, with regional malls covering a larger number of surrounding residents and showing greater resilience.

Rental decline decelerated this quarter with the average ground floor rents in the prime area falling 0.4% q-o-q, while decentralized rents declined 0.9% q-o-q in 2Q24. Challenges persist for retail projects due to intense competition and a decrease in rental affordability for brands.

We expect sectors such as affordable dining, domestic fashion brands, and discount stores to be relatively active in expansion as consumers increasingly prioritize value-for-money products. Moreover, as consumers increasingly lean towards experiences that connect them with nature and arts, we expect to see a rise in projects that blend retail spaces with culture, art, and nature.

In the second quarter of 2024, the total transaction volume in Shanghai's investment market reached RMB 15.1 billion, marking a 10.3% q-o-q decline. The number of completed transactions increased from 23 in 1Q24 to 27 in 2Q24, indicating an improvement in market activities. A total of 50 transactions were completed in the first half of this year, representing a 35.1% increase compared to the same period last year. The market focus has shifted towards small-scale investment projects, with 74.1% of them having a total value of less than RMB 1 billion.

Various types of private enterprises have actively expanded their presence in Shanghai by pursuing en-bloc or multiple floor projects this quarter. Investors are ready to allocate resources to high-value, cost-effective assets. It is anticipated that large institutions will enter the investment market in the second half of the year, which will boost up the total transaction volume.

In 2Q24, office properties accounted for the highest transaction amount (74%), followed by apartments (18%) and hotels (6%), indicating a market trend of concentrated investment in specific asset categories. Among office transactions, 65% comprised self-use projects for standalone or whole-floor properties, with a total transaction value of less than RMB 500 million. Additionally, rental housing continues to be highly sought after by investors.

Ling Sun, Head of JLL Capital Markets East China, commented, “Looking back at Shanghai's investment market in recent years, domestic investors, including both private and state-owned enterprises, have taken the lead and demonstrated strong momentum in their investment activities. Foreign institutional investors have also shown continued interest in the rental housing sector. With the anticipated correction in asset prices, we expect to witness more projects being transacted in the future."