Office space markets under pressure in small cities

The market for office space in China's second and third tier cities is under huge pressure because of high inventory and continuous supply, industry reports say.

Vacancy rates for offices in China's second and third tier cities, such as Chengdu, Chongqing and Changsha, remain at a high level, according to a recent report by CBRE, an international real estate services provider.

The office vacancy rate in second tier cities reached 27.1 percent by the end of 2015, higher than the previous year. Several cities, including Chengdu, Chongqing and Changsha, all had vacancy rates as high as 40 percent, while Tianjin, Shenyang and Wuxi registered vacancy rates around 30 percent.

"Office markets in second tier cities, except a few, came under high pressure due to glutted supply brought on by new business district construction," said Frank Chen, executive director and head of CBRE Research, China.

Meanwhile, office rents in some cities continue to decline because of increasingly fierce competition among landlords, the report says. For example, in Chengdu, capital of Southwestern China's Sichuan province, rent for offices has declined for 12 consecutive quarters. Landlords offered preferential treatment to keep and compete for tenants, which in turn accelerates the decrease in rental rates.

Behind the higher vacancy rates and lower rentals is offices' high inventory.

Insite Retail Investment Holdings Group, a commercial real estate services provider in China, also released its statistics in a report, which says by the end of last year, the inventory of Grade A offices reached 45.57 million square meters in China's major 20 cities, which was 1.7 times the number in 2010. The high inventory and consistent new supply of office space will keep the market under pressure.

However, the poor performance in renting or selling office space seems only to exist in China's second and third tier cites. In first tier cities, such as Beijing, Shanghai and Shenzhen, the office market is still full of energy, even facing the rise in new supply.

At the end of last year, the new demand amounted to 1.77 million square meters, a record high for a single season, says CBRE. Tenants in first tier cities were the largest source of demand, with demand for space from this group experiencing year-on-year growth of 70 percent. Vacancy rates in first tier cities stabilized at an average of 6.9 percent by end-2015, largely on par with the previous year.

According to the report, a total of 2.74 million square meters of new office space was delivered to the market during the last three months of last year. More than half of the new additions is located in the first ties cities. Even with the rise in new supply, vacancy rates in the first tire cities remained low, suggesting that demand continues to remain strong.

Commercial property projects, including offices, should not only satisfy clients' demands, but also lead customers' demands through innovation, said He Cheng, executive director at Insite (China). Innovation is the way to maintain success amid the competition.