Worries emerge about oversupply of office space

The construction of 40.8 million square meters of office space will be completed in the next four years across the nation's major 14 cities, fueling worries about oversupply in some second-tier cities, a report said on Thursday.

Between 2013 and 2016, the total stock of quality office space in the 14 major cities will increase 80 percent, or 40.8 million sq m, said a report on China's office property supply published by commercial real estate services firm CBRE.

Although future supply might be less than expected as the projects usually suffer delays during the construction stage, a number of second-tier cities, such as Tianjin, Shenyang and Chongqing, are likely to see supply significantly outpace demand, said Chen Zhongwei, head of research at CBRE China.

However, the undersupply situation in Beijing will remain severe, while the office space markets in Guangzhou, Hangzhou and Shanghai will become more balanced, Chen said.

The net take up of office space reached 523,865 sq m in the first quarter nationwide, down 21.8 percent quarter-on-quarter and down 37.8 percent year-on-year, which is the lowest level since the first quarter of 2009, the CBRE report showed.

New supply dropped markedly as a number of projects postponed their delivery dates. As a result, the office vacancy rate fell 0.2 percentage points to 12.6 percent nationwide.

A number of second-tier cities will experience peak office completion and delivery of projects in the next few quarters, which is expected to continue to push up vacancy rates.

As a result, rent performance will be under pressure and some projects may push back their delivery dates.

"Developers sometimes delay the projects to avoid completion in peak times," Chen said. "Tighter capital flow in a weak market might also force developers to slow down the development of some projects, or the process of getting leasing permits might take longer than expected."

Meanwhile, the stock of quality office space in Shanghai reached 10.5 million sq m by the end of 2012. The annual newly completed office floor area will peak at 1.8 million sq m in 2015.

Based on the annual net absorption in the past three years and construction slippage, the office space market in Shanghai will be in a rather balanced situation, according to the report.

Shanghai has less than 11 million sq m of office space, which is about one-sixth that of New York, said Xie Chen, director of CBRE's research department in Shanghai.

"The city will need more office space," said Xie.

Savills PLC, a United Kingdom-based real estate firm, echoed that view.

Savills said that because the country remains the world's fastest-growing large economy, many firms are expected to follow through on their previous expansion plans.

Shanghai's vacancy rates are forecast to remain below 10 percent over the next 12 months, leading to an increase in rents, if only slightly.

Rental forecasts for 2013 are at 6 percent, with rental growth expected to slow toward the end of the year, as vacancy rates rise with the addition of new space.

Regarding the challenging situation in some second-tier cities, analysts suggested that local governments with aggressive plans to build new CBDs rationalize the land supply based on more realistic forecasts for demand, and speed up completion of infrastructure and public facilities projects.