According to data released by Jones Lang LaSalle, the average rent for grade A office buildings in 40 major cities across the country in the second quarter was 82.4 yuan/square meter/month, recording different degrees of month-on-month decline of 0.4%-4.3%. The lack of elastic recovery in demand, different cities' rental trends fluctuate in the bottom range, and price competition is becoming more intense. Attracting high-quality tenants and enhancing the stability of existing tenants has become the main focus of landlords, and they have started to offer considerable rental discounts for renewals.

In the second quarter, the net absorption of grade A office buildings in 40 major cities across the country was 0.65 million square meters, a month-on-month decrease of 20.2%. In the first half of the year, the net absorption of grade A office buildings in 40 major cities across the country accounted for 46.2% of the total net absorption in 2023, which is close to half of last year's level. It is expected that the stability of market demand in 2024 can still be expected.

Key points for the second quarter of 2024:

1. The market demand gap is difficult to cover in the short term, and the willingness of enterprises to renew leases has increased. In the second quarter, the net absorption of grade A office buildings in 40 major cities across the country was 0.65 million square meters, a month-on-month decrease of 20.2%, which is quite consistent with the perceived demand contraction in the recent market. The internal logic of demand release being blocked due to the adjustment of the industry chain continues, and the trend of major traditional industry tenants shrinking and vacating is further expanding. Although the demand for relocation and upgrading in the small and medium-sized area is still active, more enterprise tenants choose to renew leases at the original site with lower rent under the drive of cost reduction and efficiency increase. From the overall situation in the first half of the year, the net absorption of grade A office buildings in 40 major cities across the country accounted for 46.2% of the total net absorption in 2023, which is close to half of last year's level. It is expected that the stability of market demand throughout the year 2024 can still be expected.

2. Lease behavior extends in both directions, and small cutting points release opportunities. In most cities across the country, the office building market is showing a trend of simultaneous "recentralization" and "decentralization." As the rent gap between the core business district and non-core district narrows, some tenants seize the window period of rent and upgrade to high-quality office space in the core district, showing a trend of recentralization migration. At the same time, there are also some tenants who move in the opposite direction to non-core areas and industrial parks with high quality-price ratio projects. The situation of top enterprises returning to their own buildings is also common, showing the trend of decentralization migration. In terms of industry characteristics, although the support of traditional industries such as finance, technology, and real estate for incremental demand is weakening, there are still structural opportunities in vertical sub-sectors. For example, driven by policy catalysis and industry trends, the leasing demand of game, artificial intelligence, and energy companies is growing significantly in cities such as Beijing and Guangzhou; the popularity of new media such as micro-drama and live e-commerce remains unabated. The industry's change and iteration accelerate, driving the continuous release of leasing demand for relevant enterprises, and their performance is outstanding in cities such as Hangzhou, Changsha, Nanning, Fuzhou, and Harbin.

3. Rental prices are hovering at the bottom, seeking the best solution in stock games. In the second quarter, the average rent for grade A office buildings in 40 major cities was 82.4 yuan/square meter/month, and recorded different degrees of month-on-month decline of 0.4%-4.3%. The lack of elastic recovery in demand, different cities' rental trends fluctuate in the bottom range, and price competition is becoming more intense. Attracting high-quality tenants and enhancing the stability of existing tenants has become the main focus of landlords, and they have started to offer considerable rental discounts for renewals. The direct effect of directly reducing rent in first-tier cities is obvious, and there is still room for rent adjustments, with a greater decline than in other cities; in some second- and third-tier cities, the marginal effect of exchanging price for quantity is decreasing, and landlords are adjusting their operating strategies to provide additional services or introduce third-party office operators to help with inventory clearance, and the decline in rent is converging.

Index interpretation: Xi'an enters the top 10 for the first time, and the ranking of top cities is refreshed

1. The top 10 cities in the ranking

Among the top 10 cities in the ranking, Xi'an entered the first tier for the first time. In first-tier cities, Beijing became the city with the largest month-on-month decline in the index in the second quarter, reaching 6.1%, and the gap with Shanghai's index is narrowing. Hangzhou and Nanjing are the only two cities where the index is growing among the top cities. Hangzhou's rent decline is the lowest among the top 10 cities, and the demand for leasing by industries such as micro-drama has driven demand activity, making it firmly in fifth place. The supply pressure in Xi'an has slowed down and the vacancy rate has steadily declined. The demand for education and training institutions is relatively active, and it has risen to the tenth place in the ranking for the first time.

2. Ranking of cities 11-20

Of the cities ranking 11-20, only four saw their indexes rise slightly. Suzhou, Qingdao, and Ningbo achieved double growth in terms of index and ranking thanks to stable de-stocking brought about by rent adjustments, demonstrating the market resilience of eastern coastal cities. Benefiting from the ongoing construction of the Belt and Road Initiative and the deepening of its development as a center radiating towards South and Southeast Asia, Kunming has attracted the active participation of numerous law firms, with many of them settling in top-grade office buildings, which has driven its index to rise by 0.5% on a month-on-month basis and for three consecutive quarters.

Ranking 21-40 cities

Weak recovery coexists with weak differentiation in ranking 21-40 cities. In the second quarter, the indexes and rankings of cities in this range showed no significant changes and fluctuated slightly within the range of -0.3% to -0.6%, with relatively stable market performance against the background of a low base. Only six cities saw their indexes rise slightly. In the second quarter, the newly added supply of top-grade office buildings in Jinan exceeded 0.25 million square meters, which ranked highest among second-tier cities in terms of supply. With concentrated supply, the market rent dropped by 4.2% on a month-on-month basis, which dragged down its index performance.

The interpretation of the diagram: The cities are divided into different zones based on the level of decline in rents. The zones above the diagonal line represent cities where the rate of decline in rents has slowed down compared to the previous quarter. For example, if a city's rent fell by 2% in the previous quarter and 1% in this quarter, it falls into the zone above the line; otherwise, it falls into the zone below the line. Cities on the diagonal line represent those where the rate of decline in rents remained unchanged for two consecutive quarters.

Summary of major urban cluster markets: Shenzhen and Shanghai lead the country in leasing de-stocking performance.

1. Rent trend

Among the 40 main cities in China, rents declined at a slower rate in 17 cities compared to the previous quarter, while rents declined at a faster rate in 23 cities, exacerbating the downward trend of rents. Among the city clusters, most cities in the Chengdu-Chongqing and Yangtze River Delta regions experienced an increase in the rate of decline in rents. In the Beijing-Tianjin-Hebei urban agglomeration, Beijing has entered a zone of slower decline in rents. In the Greater Bay Area, rents in Guangzhou began to decline more rapidly, while the rate of decline in Shenzhen began to slow down.

2. Vacancy rate zones

The span of the vacancy rate zones in the Greater Bay Area, Chengdu-Chongqing, and the cities in the middle reaches of the Yangtze River continued to shrink, while the span of the vacancy rate zones in the Beijing-Tianjin-Hebei urban agglomeration remained the largest, although the market gap between cities was shrinking. The span of the vacancy rate zones in each of the Yangtze River Delta cities showed some gains, mainly due to the impact of new project launches pushing up the vacancy rate in some cities.

3. Net absorption

In the second quarter, Shenzhen's top-grade office building market recorded a net absorption of about 0.132 million square meters, contributing the highest value to this indicator among all cities and continuing to lead the national market. The average net absorption of top-grade office buildings for the seven major cities in the Yangtze River Delta in the second quarter was about 0.029 million square meters, with Shanghai's top-grade market recording about 0.116 million square meters. The average net absorption of top-grade office buildings in the major cities of the Chengdu-Chongqing region and the middle reaches of the Yangtze River in the second quarter was 0.021 million square meters.

Q2 2024: High rents bring more adjustment elasticity to first-tier cities

1. Rent aspect

In the second quarter, the month-on-month decline in rents in the 20 key cities nationwide ranged from 0.4% to 4.3%, with 13 cities seeing a decline of 1.0% to 3.0%. In Shanghai, the concession on rents prompted a stronger willingness among larger tenants to relocate and upgrade, which drove up net absorption. In Beijing's market, landlords continued to lower rents to attract new rental demand in a market with insufficient demand, while also providing rent discounts for renewals to maintain tenant stability, which led to a 3.3% drop in rents in the top-grade office building market.

2. Vacancy rate aspect

The fluctuations of the top-grade vacancy rate in the 20 key cities nationwide increased compared to the previous quarter. Among them, the top-grade vacancy rate of six cities increased month-on-month, mainly due to new supply, with Ningbo showing the largest increase. In the second quarter, Ningbo saw about 0.095 million square meters of new supply, pushing its top-grade vacancy rate up by 2.4 percentage points to 32.4%. The top-grade vacancy rate of 14 cities decreased month-on-month, with Qingdao showing the largest decline. The self-use needs of large headquarters enterprises drove Qingdao's top-grade vacancy rate down by 4.5 percentage points to 34.9%. The top-grade vacancy rate in 10 of the 20 key cities nationwide exceeded 30.0%, while in first-tier cities, except for Beijing, the vacancy rates in Shanghai, Guangzhou, and Shenzhen were in the range of 20.0%-25.0%.

The Chinese office market is going through a difficult and slow recovery. It is difficult to effectively ease the supply-demand gap in a short period of time, and it is critical for all parties to regain confidence in stabilizing market indicators. At the macro level, the cultivation of new quality production elements may become an important part of new momentum for office demand, and structural improvement of demand is expected to alleviate supply-side pressure. Meanwhile, further macro policies and precise efforts will provide support for the continued recovery and improvement of the economy.