30m.sqm supply gap in office market of China’s 4 tier-1 cities: Beijing, Shanghai, Guangzhou, and Shenzhen
JLL’s latest research report on China's Office Market
Beijing, September 7, 2021 -- After tracking more than 200 office markets across China, JLL (NYSE: JLL) delves deep into the overall market’s characteristics, shaping the future in its latest research report on China's office market (in Mandarin). “We hope to help government, companies, and investors better understand the huge potential and challenges that lie within China's vast office market by providing a comprehensive look at its historic development, rent, and demand trends,” said Nelson Wong, Head of Research of JLL Greater China, “Our goal is to deliver an effective industry reference to guide decision-makers in their overall planning.”
Office market varies greatly across China, with Beijing and Shanghai leading nationwide in office rental costs
By analyzing official macroeconomic and commercial real estate data, covering all provincial capitals and more than 70% of prefecture-level cities across China, JLL found that the country's current office market is vastly different from city to city and is developing at various paces. Top-tier cities are ranking at the top globally, while the long-tail effect is occurring in cities at the early development stage. Due to economic, social, demographic, and other macro factors, China’s office market development includes 4 stages, from start-up to construction, development, and maturity, according to cities’ office stock volume and rent levels. Currently, only Beijing, Shanghai, Guangzhou, and Shenzhen have reached the stage of maturity, with another 70% of mainland Chinese cities at the start-up stage.
In terms of rent and volume, only four first-tier cities, namely, Beijing, Shanghai, Guangzhou and Shenzhen, have a Grade A and B office market size of more than 10 million square meters, while more than 60% of mainland Chinese cities hold less than 500,000 square meters of office space. This means that each city in the latter category has only five to eight modern-standardized office buildings. Compared to first-tier cities where average rents reach a minimum of RMB 5 per sqm per day, more than 30% of lower-tier cities record an average rent of less than RMB 1 per sqm per day. All other mainland Chinese cities rank below 50th globally in terms of office rents, except for Beijing, which ranks third, and Shanghai, which ranks 14th.
By integrating key indicators such as rent, stock, occupancy, and value-added data from the tertiary industry, JLL has developed an industry-first China City Office Leasing Cost Index. It calculates annual office space leasing cost as the percentage of the increase in related economic indicators. The proportion provides a reference for the leasing activity and rent commitment level of the office market in various cities. Taking the top ten ranking of the leasing cost index at the development and maturity stages (as shown in the figure below), the larger the rental cost index of the city is, the higher its rental commitment capacity and the stronger the market development momentum are. Cities with a high leasing cost index demonstrate an advanced level of China’s building economy, such as Beijing, Shanghai, Chengdu, and Xi'an, where have a large number of leading companies in various industries.
Leading cities see growing demand for office space, although some are experiencing oversupply
Following a comparative analysis of key economic data for Chinese cities from 2005 to 2020, JLL found that for every RMB 100 million in value added output from the tertiary industry – in China’s top 30 cities – GDP will drive an increase of 547 square meters in demand for quality office space. In particular, Shenzhen's tertiary industry growth is the strongest driver of office market demand, with RMB 100 million of tertiary growth generating an average of 1,672 square meters of demand for office space in the past 15 years. In addition to the first-tier cities, other cities with strong office demand are mostly provincial capitals such as Jinan, Xi'an, and Chengdu, which benefit from relatively strong economic growth and steady expansion demand from large companies.
Based on the analysis, JLL has also determined a demand ceiling for each city's office market. The potential demand for Grade A and B offices is around 40 million square meters in Beijing and Shanghai, 20 million square meters in Guangzhou and Shenzhen, and 7 million square meters-plus in Chengdu, Nanjing, and Hangzhou. The top 10 cities in China are deemed to have a total potential demand that exceeds the combined potential demand of more than 200 other lower-tier cities, demonstrating that China's office market demand is primarily driven by its leading cities.
According to the research, the overall volume of completed offices in the top 50 cities by economic aggregate still falls short of the potential demand ceiling by more than 60 million square meters, with four first-tier cities having a total supply gap of more than 30 million square meters. The supply side of China's office market has room to grow by about 20%. However, from another angle, China's leading cities have already completed more than 80% of the office buildings expected to meet demand needs. In particular, among the top 50 cities by economic aggregate, 17 cities have office buildings in "oversupply" and have limited room for further development. This tells us that commercial real estate developers need to transform towards intensively focusing resources and refining management, expediting synergies with new driving forces, and catering to actual industry demand.
There is a clear trend of expanding into lower-tier cities; now is the right time to implement a centralized corporate real estate strategy
Under the "dual circulation" development paradigm, many companies are focusing on the huge domestic market in China, with a plan to establish presences in the third and fourth-tier cities. According to JLL, over the last two years, the top 10 national-level TMT companies have expanded their office space by more than 1.5 million square meters in total. At least 80 national-level companies have set up offices in more than 100 cities or plan to rent office space in the near future, which has also increased company spending on acquiring and leasing real estate day by day. A domestic company with nationwide operations spends hundreds of millions of RMB a year on real estate, while industry giants such as Alibaba, Ping An, and Bank of China surpass RMB 5 billion or even over RMB 10 billion on such spending annually.
In facing huge real estate expenditures, forward-looking corporate management would be wise to swiftly embrace a long-term mindset and take a centralized approach to their real estate strategies. In this context, the need to shift from decentralized property leasing to a centralized corporate real estate (CRE) strategy is a must for survival. JLL’s white paper notes that as early as 2015, 92% of multinational companies worldwide had already established centrally-managed CRE departments. In recent years, many domestic companies have also established centralized CRE departments, implementing a centralized management model across the country.
"As a platform for carrying, delivering, and catalyzing economic growth, the office market is developing in line with social and economic transformation, showing new characteristics and new trends," said Anny Zhang, Managing Director of East China and Head of Markets of JLL China. “As Chinese companies accelerate their expansion in lower-tier cities, these cities can support the demand to help drive growth and influence the development trajectory of China's office market. With JLL’s latest whitepaper and 'JLL Office Data Product' – China's first office market data product covering more than 200 cities – we offer rich data insights and expanding business coverage to propel forward the development and transformation of the country’s commercial real estate industry."
To download the full report in Mandarin, please click here.
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 $16.6 billion in 2020, operations in over 80 countries and a global workforce of more than 92,000 as of June 30, 2021. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.