Commercial real estate in China seems to be going down the dangerous road taken by its residential cousin.
While the headlines still occupy themselves with the collapses of residential real estate developers such as Evergrande and Country Garden, news has emerged of weakness in commercial space, especially office buildings. Vacancy rates have risen, and rents have declined. The problem seems set to get worse, putting yet another hurdle in the way of Beijing’s efforts to get the country’s economy back on an adequate growth track.
Unlike residential space, Beijing never hyped or promoted office construction. Its problems are not due to overbuilding. Instead, office space suffers from the legacy of COVID-19 lockdowns and quarantines. Like office workers in the United States and Europe, Chinese white-collar workers seem to have embraced working from home. Indeed, the trend may be stronger in China than in the West because Beijing’s zero-COVID policy kept lockdowns and quarantines in place long after Western economies reopened and returned to work. This fact and staffing reductions in response to the general slowdown in China’s economy have precipitated a falling demand for office space.
The official National Bureau of Statistics offers few figures on office vacancy rates, but there are other sources of information. One comes from the regular reports of British real estate service provider Savills. That company offers a review of grade-A office space in China’s top cities—Beijing, Shanghai, Guangzhou, and Shenzhen. It shows clearly an across-the-board rise in vacancy rates in the April–June quarter, the most recent period for which data exists. The rate in Shenzhen rose some 4.1 percentage points to 27 percent. In Guangzhou, it rose still more, 5.9 percentage points to 20.8 percent. The other two cities under review showed figures in between these. A broader figure covering 18 cities puts the average vacancy rate at 24 percent.
Rents accordingly have dropped. Grade-A office space in Beijing, for example, was rented during the spring quarter at the equivalent of $45 a square foot, 7.4 percent below year-ago figures. Rents in Shanghai, Guangzhou, and Shenzhen fell as well.
With rents in decline, it is entirely reasonable to raise concerns about the financial health of commercial real estate developers and whether they will follow Evergrande, Country Garden, and other residential developers toward financial failure. Such an event or even close to it would surely compound the already severe problems facing China’s financial system and Beijing’s efforts to manage the situation. So far, there are no reports of financial difficulties among commercial property developers, but some will surely emerge if, as now seems likely, rents continue to decline.
Even before this news on office space became evident, China faced an array of formidable economic problems. With Europe in or near recession and the U.S. economy slowing and perhaps approaching recession, China’s still important exports are in decline. The dramatic collapse of the residential real estate sector and its leading firms continues to weaken Chinese finance—no small consideration since even before these problems, China already faced a significant debt overhang, especially among local and provincial governments.
Problems among developers, as well as the legacy of COVID-19 lockdowns and quarantines, have long since dried up housing demand, and the resulting drop in housing values has so detracted from household net worth that consumer spending has failed to recover the way Beijing had hoped. Imposing still more on overall growth prospects, these same factors, plus Beijing’s sudden use of old Marxist tropes, have discouraged investment by private Chinese businesses so that their spending flows have actually begun to decline.
And now the rise in office vacancy rates promises to further weaken China’s already precarious financial system and add another economic difficulty to this already large pile of problems. At the very least, these matters will deny Beijing the flow of private investment spending that it has been trying mightily to rejuvenate. These problems in commercial real estate may not be the final straw that breaks the camel’s proverbial back, but this latest news is far from good news for China or Beijing.
