HOW SERIOUS IS THE OVERSUPPLY SITUATION?

Over the past 12 months, numerous media outlets have highlighted the high office vacancy rates in China’s Tier 1 cities, prompting discussions on the office overbuild and soft demand. From 2000 to 2013, Shanghai’s annual Grade A office supply averaged 440,000 sq m, which was roughly balanced with a net absorption of 420,000 sq m per annum. The trend shifted in 2014 when decentralised areas began significant development, marked by the completion of the first Grade A office project in the Hongqiao Transportation Hub (HTH). This initiated annual supply to surge to over one million sq m. This growth peaked in 2017 with 2.3 million sq m of new supply from projects in HTH, Qibao in Puxi, and Expo and New Bund in Pudong. From 2014 to 2023, the annual supply averaged 1.3 million sq m, against a net absorption of 960,000 sq m, including self-use space. As of Q1/2024, the slowing demand and substantial supply have pushed the vacancy rate of Shanghai’s Grade A office market to 21.7%.

Shanghai’s office stock (all grades) reached 107 million sq m by 2022 according to the Statistics Bureau. Assuming similar or higher vacancy rates than the Grade A market this would mean that there is more than 23 million sq m of vacant office space in the city. Added to that, a further eight million sq m of Grade A office projects are expected to enter the market before 2030. Supply may start to abate after this point with the government reducing Shanghai commercial land supply by 80% in 2024 and  rumours at the start of the year about a suspension of project approvals. A number of developers are also considering reducing the space allocated to offices in their projects allocating more to alternative uses like hotels.