Beijing office market enters a more mature stage
Beijing registered 8,400 office leasing transactions in the past seven years, underlining the market’s fundamental strength and longer-term demand.
The Beijing office market is facing unprecedented challenges, with leasing demand remaining weak. After experiencing two major supply peaks in 2008 and 2018, the market has moved from fast expansion to a more mature stage.
2019 marked a turning point for Beijing’s office rental market
Financial and professional services together with technology firms accounted for over 8,400 leasing transactions in the past seven years. Financial and tech sectors stood out as key demand drivers in the Beijing office market, and the total rents paid by occupants in these two sectors well exceeded the total of other sectors.
Office rents started declining in 2019. Prior to that, rental growth around Beijing maintained an upward trajectory on the back of solid leasing demand, reaching a peak in late 2018. However, the downturn was already set in motion by 2019. Since then, Beijing rents have fallen for nearly five consecutive years, registering a cumulative decline of 22%. Instead of a landlords’ market with undersupply and low vacancy, momentum has shifted to favour tenants in what has become a tenants' market.
Figure 1: Average size of leased space and net rent (2017-1H23)
Source: Average size of leased space and net rent (2017-1H23), JLL Research, Q2 2023
Looking closer at rental changes in Grade A and non-Grade A office buildings over the years, we estimated that the total rent reduction in the Grade A market is RMB 75/sqm/month since the downward cycle in 2019, which exceeded non-Grade A rent reduction of RMB 50/sqm/month. At the same time, the average size of all leasing transactions in Grade A buildings tracked by JLL has fallen by 23% in H1 2023 compared to pre-pandemic, while the same figure for non-Grade A buildings has dropped by 45%.
In terms of affordability, as of the first half of 2023, the average rents of all sectors have fallen to their lowest level in seven years. Our data shows that the current rental affordability for most sectors sits just at RMB 211-316/sqm/month, compared with RMB 305-395/sqm/month pre-pandemic. Even for the “richest” industry, financial services, the average rent has dropped from RMB 429 to RMB 355/sqm/month.
By the size of leased space, there has been a convergence trend in rents during the past years. As such, in the current downturn, large tenants have not received the discounts they expected. Thus, most of the large-sized relocation or upgrade demand has not been successfully stimulated.
Figure 2: Average rent by size of leased space (2017-1H23)
Source: Average rent by size of leased space (2017-1H23), JLL Research, 2Q23
The Beijing office market has entered a new phase
Beijing has always been China’s most expensive office market. However, as a fixed cost pressure on companies, downward pressure on rental costs is inevitable in the current environment. The market reaction to lower costs can fit the bill and drive healthy fundamentals.
In the transformation to a mature market, a surge in demand and rental growth will probably not take place in the near-term. However, the city’s fundamentals remain sound given that it has the highest proportion of the country’s tertiary industry (83.8%), making the office occupiers more willing and able to afford current market rentals. Office rents are expected to bottom out in the next 1.5-2.0 years, with a slow but steady move towards a new equilibrium over the next five years.