North China commercial real estate rises to the challenge, market players should seize the timing to change

Beijing, 9 January 2020 – The slowing economy has made for an arduous year in North China, impacting the commercial real estate market. JLL’s latest report, No pain, no gain: slowdown repositions market for future growth highlights the challenges and triumphs of 2019 – a year that saw both market lows and highs, with office rents declining, but record investment pouring into Beijing. Tianjin, Qingdao, and Shenyang suffered further increases to vacancy under weakening demand, yet growth in these markets continued, if at a slower pace than previously. In 2020, headwinds are set to remain, but this also presents a key moment for change.

“Despite the economic hardships of 2019, we saw great resiliency in markets across North China,” said Julien Zhang, Managing Director for JLL North China. “Beijing attracted a record level of en-bloc investment from investors at home and afar, a testament to the investment viability of the city. We also saw cases of notable performance in Tianjin, Qingdao, and Shenyang. As tough conditions continue in 2020, stakeholders will need to be increasingly strategic and innovative to overcome challenges in the market.”

Beijing: Tough market still sees record year of investment; office sector highly popular

Beijing witnessed slower market performance in 2019, especially in the office market as demand slowed considerably for the first time in a decade. In the Grade A market, full-year net take-up for 2019 was down 32% from the 2018 figure. Meanwhile, overall vacancy rose from 6% at end-2018 to reach 11.3% at end-2019, recording the highest level since 2010. Market rents declined by -4.0% y-o-y, entering a long-anticipated adjustment period.

In the retail market, landlords became increasingly concerned towards the end of the year, as weaker demand suggested that the lag from economic uncertainty could no longer be ignored. Although slower sales performance was recorded, in considering the full picture, we see that the market was still able to achieve stable rent growth in 2019.

In the industrial market, which was the most enviable sector growth-wise in Beijing, limited supply continued to fuel strong rent growth in 2019, as demand remained largely stable in prime locations despite ongoing economic pressures.

Despite the lows endured in the market throughout the year, strong market fundamentals in Beijing held up against the slowing economy, attracting investors from both at home and afar. En-bloc transactions for 2019 reached a total volume of nearly RMB 80 billion, more than doubling the figure from 2018. Office assets were the most popular, accounting for nearly 70% of transactions.  

“Investors were unwilling to let economic pressures override their strong confidence in the future of Beijing,” said Mi Yang, Head of Research for North China at JLL. “Moreover, as this period of adjustment helps to remove weaknesses, setting a better position for the market to benefit from healthier gains in the long run, investors are recognising real value in opportunities arising in the city.”

Tianjin: Large supply and high vacancy weigh on market, but Jing-Jin-Ji offers bright spot for growth

The economic slowdown and huge supply challenges weighed on rent growth throughout 2019, particularly in the office and industrial sectors. Yet, despite this pressure, office demand continued to grow in 2019, contributing to the highest net absorption totals recorded since 2005 (230,000+ sqm) – although this was difficult to see on the surface, given that vacancy rates in Tianjin are among the highest in China. Meanwhile, occupied Grade A space grew by more than six-fold in the past decade. Landlords of top-performing projects were still able to command reasonable rents in 2019.

As economic uncertainties carry into 2020, local government subsidies to promote growth during this period of economic difficulty are expected to assist with high-vacancy challenges in the market. As long as strong performers maintain reasonable rent levels and secure occupancy rates, Tianjin will continue to do well selectively at the project-level. As such, the market will remain a careful study for stakeholders investing in the city over the foreseeable future.

Qingdao: market feels pressure, conservative demand expected

Economic uncertainty has been directly linked to downward pressure in the commercial real estate market, but 2019 still saw positive, if limited, net absorption figures. This demonstrated that there were still drivers of demand across sectors. In the Grade A office market, professional services demand was largely steady throughout the year. For the retail market, suburban malls showed huge potential for future development, becoming a hot spot for brands eyeing growth opportunities in new markets. In the industrial market, stable retail demand in centrally located submarkets helped to support rent growth for core area logistics projects.

As general expectations for 2020 are still shadowed by concerns, demand for commercial real estate in Qingdao is predicted to be much more conservative. As such, Grade A office market rents are expected to hit bottom, with -5.0% y-o-y growth forecast for 2020. In the retail market, decentralisation will be crucial to moving forward, as suburban areas become the focus of the future. The relocation of Qingdao Jiaodong International Airport is likely to give rise to new development opportunities along the airport corridor, where emerging logistics areas are expected to become important local hubs.

Shenyang: oversupply makes for tough market; industry upgrade to help spur growth

Shenyang is facing great challenges, and this is having a huge impact on its local commercial real estate market. Market expectations continue to be low as new demand growth is limited. Large office supply further slowed the leasing progress, pushing the overall vacancy rate to a new three-year high. Landlords in the retail market pursued growth strategies in an effort to negate pressures from the slowing economy. The industrial market faced imposing supply levels in 2019, resulting in high vacancy. Still, projects by experienced developers performed at a much higher level than the market average, and we saw growth across sectors, if limited.

In Shenyang, wider city-level plans to upgrade industry are expected to push forward, helping to stimulate growth. The TMT sector is predicted to continue increasing its presence in the market, and together with the finance and professional services sectors is destined to have a ripple effect as related industries form and develop, adding to office leasing demand. Infrastructure improvements and better metro linkages will also benefit connected office and retail projects.

“Although hit hard by the economic downturn, North China has still managed to push through and achieve growth in different ways,” said Mi Yang. “As the market continues to face tough conditions in 2020, stakeholders will need to adjust their strategies accordingly and improve service quality through continuous innovation in order to secure more wins.”

For more information on 2019 overview & 2020 outlook, please download the report- No pain, no gain: slowdown repositions market for future growth.