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Savills Research

Office Beijing – October 2020

Vacancy rates continue to riseDemand saw a gradual resurgence though the supply wave is still challenging the citywide office market.

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“ The citywide office market is still under substantial pressure due to the abundant new supply and slower absorption even as COVID-19 was effectively contained and market demand resumed to some extent, resulting in a continued increased citywide vacancy rate. Another supply influx is ahead in Q4/2020 and will further impact the supply-demand balance in Beijing’s office market.” VINCENT LI, SAVILLS RESEARCH

• Beijing’s Grade A office market saw two new projects launch in Q3/2020. ZT International Centre A/B in East 2nd Ring Road made its debut in August, bringing 124,000 sq m of office space to the market.

• Another new project, Evergrande Centre (previously known as the Tsinghua University Guanghua Road Project) in CBD Core Area, contributed 119,000 sq m of office space to the market. Citywide Grade A office stock then reached 12.73 million sq m (including self-use GFA) by the end of Q3/2020.

• Citywide vacancy rate increased by 1.4 percentage points (ppts) quarter-on-quarter (QoQ) and 5.9 ppts year-on-year (YoY) to 15%, primarily due to the recent supply wave.

• Citywide Grade A office average rent declined for the seventh consecutive quarter, pushing the rental index down 1.3% QoQ and 3.5% YoY to RMB354.8 per sq m per month in Q3/2020.

• Some tenants responded to the current market uncertainties by utilising conservative strategies to either renew their existing tenancy agreements or relocate to other regions with lower rental levels.

• Beijing is expected to see another supply influx, mainly from Lize Financial Business District (FBD), in Q4/2020, bringing around 590,000 sq m to Beijing’s office market.

• The State Council unveiled plans for the Beijing Free Trade Zone (FTZ) on September 21st.

Anthony McQuadeManaging DirectorNorth China+8610 5925 2002anthony.mcquade@savills.com.cn

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Gary WenSenior DirectorBeijing+8610 5925 2064gary.wen@savills.com.cn

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Savills team

James MacdonaldSenior DirectorChina+8621 6391 6688james.macdonald@savills.com.cn

Vincent LiAssociate DirectorNorth China+8610 5925 2044vincentx.li@savills.com.cn

RESEARCH

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SUPPLY AND DEMANDBeijing’s Grade A office market saw two new projects launched in Q3/2020: ZT International Center A/B, located in East 2nd Ring Road, brought 124,000 sq m of office space to the market, and Evergrande Centre (previously known as Tsinghua University Guanghua Road Project) which is based in CBD Core Area, contributed 119,000 sq m of office space to the market. Citywide Grade A office stock then reached 12.73 million sq m (including self-use GFA) by the end of Q3/2020.

Market demand saw a resurgence in Q3/2020 after COVID-19 was effectively contained and society was returned to a semblance of normalcy. Citywide net absorption reached 38,200 sq m in Q3/2020, up 12.3% QoQ but still down 66.2% YoY. Submarkets with lower rental levels, e.g. Lize FBD saw greater transaction volume and achieved a positive net absorption in the quarter, reflecting a new market trend.

RENTS AND VACANCY RATESThe citywide vacancy rate increased by 1.4 ppts QoQ and 5.9 ppts YoY to 15%, primarily due to the continued supply wave.

Beijing Financial Street (BFS) and Zhongguancun (ZGC) maintained relatively low vacancy rates during Q3/2020 thanks to their steady tenant profiles, hovering at 2.7% and 4.1%, respectively. By contrast, CBD’s vacancy rate rose to 16.9%, up by 3.1 ppts QoQ. Major non-prime submarket East 2nd Ring Road saw its vacancy rate move up by 18.7 ppts QoQ to 24.9% due to the launch of ZT International Centre A/B.

Lize FBD, on the other hand, exhibited decent absorption and its vacancy rate

decreased by 4.3 ppts QoQ and 24.3 ppts YoY to 55.8% in Q3/2020. Lize offered lower rental level and plenty of options for tenants to choose either for new lease, expansion or relocation purpose.

Citywide average rental level continued to trend downward in Q3/2020. A majority of tenants remained conservative, adopting a wait-and-see approach to the market under the current uncertainties, leading a less active market YoY. Most landlords had to lower their rent expectations or offer more incentives to accelerate absorption, resulting in the citywide Grade A office average rent declining for the seventh consecutive quarter. The rental index was down 1.3% QoQ and 3.5% YoY to RMB354.8 per sq m per month in Q3/2020.

MARKET OUTLOOKAnother supply influx of around 590,000 sq m will hit the market in Q4/2020, and the citywide vacancy rate is expected to rise to close to 20%. New supply in Q4 will be mainly in Lize which will continue to intensify competition in the precinct and offer diversified options to tenants willing to relocate or upgrade. Lize is anticipated to see brisk transaction activities in Q4.

The State Council unveiled plans for the Beijing FTZ on September 21st, which was then launched on September 24th. The area will occupy 119.68 sq km, including areas for science and technology innovation, international business services and high-end industries. The Beijing FTZ will benefit the citywide commercial real estate sector and create both business opportunities and leasing demand, bringing new energy to the citywide office market.

Source Savills Research

GRAPH 1: Supply, Take-up And Vacancy, 2015 to Q3/2020

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GRAPH 2: Vacancy Rates In Each Submarket, Q4/2015 to Q3/2020

Source Savills Research

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Citywide CBD BFSZGC CBD's Vicinity LufthansaEast 2nd Ring Road East Chang'an Avenue WangjingAsia-Olympic

GRAPH 3: Rental Indices In Each Submarket, Q4/2015 to Q3/2020

Source Savills ResearchSource Savills Research

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Citywide CBD BFSZGC CBD's Vicinity LufthansaEast 2nd Ring Road East Chang'an Avenue WangjingAsia-Olympic

Note All submarkets are based on an index value of 100=Q1/2000, excluding: ZGC – 100=Q1/2002；Wangjing – 100=Q3/2008 Asia-Olympic – 100=Q4/2010； Lize starting – 100=Q4/2017

Office

TABLE 1: Major Leasing Transactions, Q3/2020

COMPANY INDUSTRY ORIGIN PROJECT LOCATION GFA(SQ M)

Insight Intellectual

Property Attorneys

Professional Services Domestic

China Overseas

PlazaCBD 2,400

Lize FBD Administrative

Committee

Public Organisation Domestic USM Tower Lize 2,200

Auto Home Information Technology DomesticChina

Electronics Plaza

ZGC 1,980

Qingfeng Technology Co.,

Ltd.

Information Technology Domestic CCT Centre Wangjing 740

Chiho Environmental Group Limited

Professional Services Domestic

Gateway Plaza Lufthansa 650