Significant amounts of new Grade A office space supply entering the market over the next few years and questions about the health of China’s economy are making the outlook for office rents in Shanghai very interesting.

Another Puxi

The new supply will come mostly in the non-central areas of Puxi. Our data shows that in the period 2015 to 2019, approximately 4 million square meters of new GFA will open across the districts of Minghang, Changning, Yangpu, Zhabei, Putuo, Hongkou and western Xuhui.

Considering that the GFA of all Puxi grade A buildings roughly totals 4,500,000 sqm at present, the new non-central supply almost doubles the amount of Grade A space west of the Huangpu. In fact, as about 1 million sqm of new supply will also be added during the period to Puxi’s central CBD areas of Huangpu, Jingan, Changning and Xuhui, we can say that total Grade A space in Puxi will indeed double over the next five years.

Nearly Half a Pudong

Aside from Shanghai Tower opening this year and the CITIC Shipyard Buildings next year, crowded Lujiazui will see few new office towers before 2020. The peripheral areas of Pudong, however, will see a flood of new buildings with combined GFA of approximately 1,300,000 sqm. We estimate this 1,300,000 sqm to roughly equal 40% of the total existing supply in Pudong.

Demand?

Office rents are determined by the ratio of supply versus demand. While the entry of the massive amounts of new supply mentioned above is all but certain, demand in the Shanghai office market is less predictable. A big slowdown in economic activity that recent news reports suggest may occur would certainly have big impact on demand, but will such a big slowdown actually occur?

In our opinion it is too early to say how China’s economy will perform this year, let alone the coming five years. The nation has a giant, complex economy that that is linked to the greater world economy in countless ways. While certain sectors seem to not be performing well, others seem to be doing well and even expanding. Moreover, whether or not China hits its target of 7% growth may not be so pivotal as even growth of 5% or 6% is still massive growth in absolute numbers, given the size of China’s economy.

Given these considerations, we expect demand for office space in Shanghai to continue growing in the immediate years ahead.

Rents in the Balance

We expect the new supply to have little impact on office rents in Lujiazui as few financial companies will opt to move office to noncentralareas, judging by their past behavior.

The massive amount of new supply coming to Puxi, on the other hand, will surely impact office rents west of the Huangpu. Increased competition within and between non-central districts such as Yangpu, Zhabei, Hongkou and Greater Hongqiao will put strong downward pressure on rents in these areas.

The new supply should also impact rents in Puxi’s traditional CBDs as well, but the impact may be less than one might expect for such large quantity. We believe the preference for offices in the highly developed CBD areas within the inner ring road will persist as these areas offer tenants prestige and proximity to important clients. Moreover, the non-central areas generally cannot yet compete with the traditional CBDs in terms of retail, dining and entertainment options, ease of commute and other aspects.

Over the past two years office rentals have increased dramatically in Pudong and moderately in Puxi. Moving forward we are expecting a much slower increase in rental rates for most of Shanghai, and for Greater Hongqiao and the non-central districts we are expecting rentals which are stable or even declining.

Market Notes

Six new projects opened in the 1st half of the year 2015, bringing the market a total of 260,000 sqm in new supply.

Average office rents in Pudong have reached CNY 13 / sqm / day in Lujiazui, CNY 8.4 / sqm / day in Century Avenueand CNY 10.1 / sqm / day in Zhuyuan.