Cost-driven demand prevails amid intensifying market competition; investment activity rebounds

Shanghai, April 9, 2025 – Cost-driven leasing demand continued to characterise Shanghai’s office market in 1Q25. According to Neo Huang, Head of Office Leasing Advisory for Shanghai and Head of Retail for East China, JLL, “Landlords continue to take rental concessions and offer attractive incentives in exchange for occupancy amid large supply influx in Shanghai’s office market.”

In the retail market, demand from sectors that emphasize health, entertainment, and value for money remained solid. Shanghai’s investment activity sees a rebound with 24 en-bloc transactions completed in 1Q25. Shanghai’s hotel market performance remains stable with relaxing visa policies continue to drive inbound tourism. High-end residential properties continue to attract homebuyers seeking to upgrade, while decline in secondary prices shows signs of moderation amid continued recovery in sales momentum.

Grade A Office

In 1Q25, rental decline and increased incentive offerings continued to trigger office relocation and upgrade demand. Net absorption recorded 91,200 sqm this quarter. “Cost-driven demand continued to be the primary driving force of the Shanghai office market.” said Stanley Jiang, Senior Director of Office Leasing Advisory for JLL Shanghai. CBD net absorption recorded 46,200 sqm, mainly from domestic financial and professional services companies leveraging current market opportunities. Net absorption in the decentralised submarkets recorded 45,000 sqm. Rental decline incentivised a diverse tenant base to optimise their leasing strategies. Some tenants from Grade B and suburban areas upgraded to Grade A projects amid diminishing rental disparity.

Three new projects totalling 180,000 sqm entered the market in the first quarter. Two projects delivered 86,000 sqm to the CBD market, pushing up the CBD vacancy rate to 16.7%, an increase of 0.3 ppts q-o-q. One project of 94,000 sqm reached completion in the decentralised market. The vacancy rate increased by 0.2 ppts q-o-q to 29.2% amid intensified competition.

Overall rents further trended down as the market remained tenant favourable. In the CBD market, rents decreased by 2.2% q-o-q. To retain existing key tenants or attract new ones, landlords remained flexible in negotiations on renewal and new lease terms. In the decentralised market, rents decreased by 2.6% q-o-q. To attract tenants, landlords continued to offer substantial rental incentives, particularly in submarkets or projects with high vacancy rates.

In 1Q25, the Shanghai business park market’s net absorption recorded 67,800 sqm. Overall, tenants continued to adopt cautious leasing strategies. According to Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory, “Cost-driven relocations and upgrades remained the primary source of demand. Integrated circuits, artificial intelligence, and life sciences are engines of industrial transformation, with their leasing demand remaining robust. Additionally, demand from headquarters-based corporations and government-backed industrial incubators and research institutions is also active.”

The completion of four projects this quarter delivered a total GFA of 420,600 sqm. The large new supply pushed up the overall vacancy rate by 2.3 ppts q-o-q and 3.3 ppts y-o-y to 23.1%. 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 2.4% q-o-q and 11.5% y-o-y to RMB 3.9 per sqm per day.

In 1Q25, demand remained relatively steady. Net absorption reached 89,000 sqm, slightly exceeding the corresponding period of 2024. 3PL firms continued to contribute to leasing activities. The vacancy rate continued to rise in 1Q25, reaching 28.0%, as major projects continued to come online. Tenants remained cautious regarding expansion activities, resulting in slow absorption progress for many new projects.

Overall supply continued to increase in 1Q25, pushing the total non-bonded stock level to over 10 million sqm. Three projects totalling 442,000 sqm reached completion in the quarter, with Songjiang, Qingpu, and Jinshan all recording new projects entering the market. This quarter's supply is primarily located in the west Shanghai submarkets; however, the allocation is expected to extend to other submarkets this year. For instance, Fengxian, Lingang, Jiading, and Northwest are all expected to see new completions.

Overall rents decreased by 3.7% q-o-q on a like-for-like basis to RMB 1.35 per sqm per day, reflecting a 10.6% y-o-y decline. Richard Huang, Senior Director of Logistics & Industrial for JLL China remarked, “The continued supply influx and elevated vacancy level have prompted aggressive pricing strategies from landlords in the market.”

The slowdown in project launches caused a 34.5% q-o-q decline in Shanghai's primary home sales volume, totalling 1.49 million sqm in 1Q25. Pre-sale performances varied greatly among new projects, with high-quality ones in prime locations retaining solid demand. Buying demand for high-end projects remained robust this quarter. However, a decrease in new high-end project launches led to a 46.3% q-o-q fall in high-end sales volume in 1Q25, with 1040 units registered as sold.

New home supply declined sharply this quarter due to the Chinese New Year Holiday in January and developers' slowdown in project launches in February. This quarter's new home supply totalled 0.78 million sqm, marking an 62.3% q-o-q decline. The pace of new high-end project launches slowed in 1Q25, with only four high-end projects totalling 635 units launched for sale, a 65.9% q-o-q decline. The average prices of the four new high-end projects ranged between RMB 143,000 per sqm and RMB 189,000 per sqm.

Shanghai’s average high-end primary price edged up 0.5% q-o-q to RMB 144,600 per sqm in 1Q25. Meanwhile, continued recovery in high-end secondary sales led the average secondary price to see a narrower decline, down 1.6% q-o-q to RMB 135,500 per sqm. “Looser credit conditions combined with Shanghai's loose stance on housing policies are expected to help sustain the ongoing recovery of homebuying sentiment in both primary and secondary home sales markets,” said Sherril Sheng, Research Director for JLL China Residential Sector. High-end primary prices are expected to edge up further, while high-end secondary prices are likely to experience slower declines as homebuying demand for high-end secondary projects further recovers.

Relaxing visa policies has been a key driver for inbound tourism in China. Shanghai's overall hotel market performance remains stable as both domestic and international tourism markets continue to gain traction. From January to February this year, Shanghai welcomed 0.95 million international visitors, marking an increase of 34.2% compared to the same period last year. Meanwhile, as of February, the city’s five-star-rated hotel occupancy rate recorded a year-on-year increase of 1.2%. Despite slight declines of 2.3% and 1.0% in average room rates (ADR) and revenue per available room (RevPAR), respectively, the overall market performance remains stable.

In the first quarter of 2025, Shanghai witnessed the addition of 595 new rooms. Around 3,500 new rooms are scheduled to open in the remainder of the year. Some notable ones include Waldorf Astoria Qiantan (203 keys), Thompson Expo (255 keys), and Shangri-La and Traders hotels near Hongqiao Airport (611 keys).

“Shanghai’s hotel market is poised to enter a new phase of comprehensive recovery. With the introduction of a slew of favorable policies, the surge in overseas tourism to China is expected to continue heating up, thereby injecting sustained vitality into Shanghai's hotel market,” said Tao Zhou, Managing Director, Head of JLL Hotels & Hospitality Group Greater China