Beijing Office Market Pressures Persist, Retail Property Rents Stabilize

In the third quarter of this year, the Beijing office market continued to face pressure.

According to a report recently released by JLL, in the third quarter of this year, the vacancy pressure in the Beijing office market did not show a significant easing, and the rent of Grade A office buildings in the city continued to decline, with a decrease of 3.1% and 14.3% respectively on a quarter-on-quarter and year-on-year basis. Market transactions were mainly driven by cost-saving relocation needs, and some projects achieved significant results by trading price for volume.

At the same time, although the supply of Beijing's retail real estate market is still at a high level, the vacancy pressure is limited, but the rent growth has slowed down and tends to be stable.

"The recent release of the central bank's 'package' of new policies has significantly exceeded the market's previous expectations. With the implementation of the new policy, the loose monetary policy environment is gradually bottoming out, which will effectively alleviate the market's liquidity pressure and further boost the confidence of the commercial real estate market in Beijing and even the whole country," said Zhang Jisu, Managing Director of JLL North China.

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Office rent reduction

Since 2022, the Beijing office market has entered a downcycle, with rent levels showing a downward trend and vacancy rates continuously increasing.

JLL's report shows that in the third quarter of 2023, the Beijing office market continued to face pressure.

"Enterprises are reducing their rent, expiring and returning rent, and even returning rent during the lease period, and some sub-markets are facing greater pressure to vacate. However, thanks to the support of self-use demand, the overall vacancy rate decreased by 0.2 percentage points quarter-on-quarter to 11.9%," JLL's report shows that enterprises are highly sensitive to rent discounts at present, forcing some owners to provide unprecedented discounts to facilitate transactions, leading to intensified competition between projects and further lowering overall rents.

Relevant data shows that in the third quarter of this year, the rent of Grade A office buildings in Beijing continued to decline, with a decrease of 3.1% and 14.3% respectively on a quarter-on-quarter and year-on-year basis.

"Under the cost control strategy, enterprises are cautious about new establishment and expansion, and the demand for rental market growth is insufficient. The demand for Grade A office buildings mainly comes from the technology and internet, energy, and professional service industries. The demand from the technology and internet industry continues to stabilize, with leading enterprises increasing their investment in the artificial intelligence track, contributing to a larger area of rental transactions. Energy enterprises led by state-owned enterprises have performed brilliantly, with non-renewal transactions accounting for 20% of the transaction area. In addition, the demand from the professional service industry shows resilience, and policy benefits for the education and training industry have driven the market activity of education enterprises to rebound." JLL believes that in the third quarter, the transactions in the Beijing office market were mainly driven by cost-saving relocation needs, and some projects achieved significant results by trading price for volume.The report also indicates that the pressure of vacancy has not seen a significant alleviation, and some sub-markets still face certain de-stocking pressures. "The current low-rent window provides an opportunity for enterprises pursuing cost-performance ratio to reduce costs and relocate to higher quality office spaces," said Zhang Siliang, Senior Director of JLL Beijing Commercial Real Estate Department. "The loss of existing tenants, coupled with weak new demand, the accumulated de-stocking pressure may drive owners to increase the intensity of rent reduction, and provide more flexible business terms and value-added services to find the balance point of pricing strategy. It is expected that the rent of Grade A office buildings in Beijing will be reduced by 13.6% for the whole year of 2024."

Retail real estate is stabilizing

Compared with the office market, although the supply of Beijing's retail real estate market is still at a high level, the pressure of vacancy is limited, but the rent increase has slowed down and tends to be stable.

It is worth mentioning that in the first half of this year, Beijing's retail real estate market has been quite active, and the market rent has also been rising continuously. Especially the retail brands such as catering and women's wear have been actively expanding in Beijing, injecting new momentum into the retail real estate market.

However, the latest report from JLL shows that in the third quarter of this year, the rent increase of Beijing's retail real estate market has slowed down.

"After the profit of retailers represented by catering slows down, the difference in rent expectations between them and the owners begins to emerge. The former seeks to reduce rent to improve profit, while the latter hopes to continue to raise rent to achieve revenue targets. Therefore, the rent of most projects has tended to be stable." The report from JLL shows that in the third quarter of this year, the rent increase of Beijing's retail real estate has slowed down and tends to be stable, and only a few new projects entering the stable period still have room for increase. The city market rent increased by 0.2% month-on-month, while the suburban area was 0.4%.

In addition, the report also points out that the demand recovery is slowing down, but the momentum of new store openings is not affected. Catering retailers are facing rising costs and intensified competition, leading to a decline in profit, and the demand for future expansion is slightly reduced. However, the catering, fashion, and lifestyle new stores signed in the first half of 2024 still continued to open in the third quarter, effectively de-stocking the vacant area, especially in new projects. Therefore, the net absorption of the city market reached 86,471 square meters, maintaining a healthy level.

In terms of supply, the data from JLL shows that in the third quarter of this year, Beijing's retail real estate added a supply of 220,000 square meters. Thanks to the active demand during the pre-lease period, the average opening rate reached 70%. The effective de-stocking of the incremental area helped the city's vacancy level to remain stable, with the city vacancy rate only increasing by 0.3 percentage points to 4.8%; while the suburban vacancy rate decreased by 0.2 percentage points, recording 7.6%.

"The new supply of Beijing's retail real estate for the whole year of 2024 is expected to be 1.63 million square meters, reaching a historical peak. However, the supply and demand pattern remains balanced, because mature developers start pre-leasing three quarters in advance, and the strong pre-leasing results in the first half of the year ensure a considerable opening rate. However, the slowing down of the demand recovery slope, and the slight imbalance of expectations between the leasing parties of the existing projects, will lead to a slowdown in rent increase. The city market is expected to increase by 2.5% year-on-year in 2024, and the core market is 2.0%." Ji Ming, Director of JLL North China Research Department, said.