In China, the commercial real estate sector is showing signs of distress, mirroring the challenges faced by its residential counterpart. While residential real estate giants like Evergrande and Country Garden have been making headlines for their financial woes, the commercial sector, particularly office buildings, is also experiencing increased vacancy rates and declining rents. This trend is expected to worsen, further complicating Beijing’s efforts to stabilize economic growth.
Unlike the residential sector, the commercial real estate problems are not a result of overbuilding. Instead, they stem from the lingering effects of Covid-19 lockdowns and quarantines. Chinese white-collar workers have increasingly adopted remote work, similar to their counterparts in the United States and Europe. This shift has been more pronounced in China due to Beijing’s stringent zero-Covid policies, which have kept lockdowns and quarantines in place longer than in western countries. Additionally, a general economic slowdown in China has led to staffing reductions, further reducing the demand for office space.
Data from the British real estate service provider Savills indicates that office vacancy rates have increased in China’s major cities like Beijing, Shanghai, Guangzhou, and Shenzhen. For instance, the vacancy rate in Shenzhen rose by 4.1 percentage points to 27%, and in Guangzhou, it increased by 5.9 percentage points to 20.8%. Another report from real estate services company CBRE states that the average vacancy rate across 18 cities is at 24%.
As a result of these rising vacancy rates, rents have also declined. According to Savills, the rent for Grade-A office space in Beijing fell by 7.4% compared to the same period last year. Rents in other major cities have also decreased. This decline in rents raises concerns about the financial stability of commercial real estate developers and whether they will face financial difficulties similar to those of residential developers like Evergrande and Country Garden.
These challenges in the commercial real estate sector add to an already complex set of economic issues facing China. The country is grappling with declining exports due to economic slowdowns in Europe and the U.S., a collapsing residential real estate sector, and significant debt levels, particularly among local and provincial governments. The rise in office vacancy rates is likely to further weaken China’s financial system and hinder private investment, exacerbating the country’s economic challenges.
