GUANGZHOU -- Filling China's office towers has become a tall order.
The vacancy rate for premium office space in tech hub Shenzhen reached 26.4% in the April-June quarter, up 7.5 percentage points from the same period in 2019, according to real estate services group Savills. Current vacancy rates in Beijing and Shanghai, while not as bad as in Shenzhen, are 3 to 9 points higher than two years earlier.
Underlying these high vacancy rates is the brisk pace of spending on construction in the past few years. China's investment in real estate development for office buildings surged to more than 600 billion yuan ($92.6 billion at current rates) in 2015 from about 180 billion yuan in 2010 and remained at elevated levels through 2020, according to the National Bureau of Statistics.
A comparison of vacancies against the first quarter shows a modest improvement in certain cities. But China's metropolises will see a return or worsening of oversupply conditions in the July-September quarter and beyond, Savills predicts.
These projects counted on expectations of growth in demand for office space as the government promotes a shift to high-tech industries. The buildings that broke ground during this investment upswelling are now flooding the market. A modest improvement in the office market will not be enough to bring down the vacancy rate against this overcapacity.
In Shenzhen's Futian financial district, a 65-story building "was 70% vacant at its worst point," a property market source said. While lease activity has picked up somewhat, monthly rent per square meter remains depressed at 200 yuan ($30), or about 60% of pre-pandemic levels, according to this person.
The problem is not confined to just one building or district. With the coronavirus, telecommuting by workers became more prevalent, spurring companies to relocate or downsize to cheaper workspaces, and office vacancies remain stubbornly high in Chinese cities.
"More business leaders are focused on cost performance," a real estate broker in Shenzhen said, explaining the exodus from the central business district.
Such is the concern in China's government over excess capacity and debt in the property sector that a new ban has been announced on construction of "super skyscrapers."
As the slump drags on, a fight for survival is playing out.
In June, office and commercial property developer SOHO China decided to sell a majority stake in itself to Blackstone, the world's biggest alternative asset manager, for up to $23.6 billion Hong Kong dollars ($3 billion). SOHO China has struggled to keep up with bigger players in terms of the scale and speed of its projects. The developer suffered a third straight year of falling net profit in 2020.
Other players are changing focus. Greenland Holding Group has shifted its emphasis to residential property. Office and commercial property accounted for only 24% of the value of sales contracts in 2020, down more than 10 percentage points from 2019, compared with 76% for the residential business.
CapitaLand, a major real estate developer in Singapore whose top earner is the Chinese market, has also made a drastic change. It will sell a portion of its stakes in six Chinese properties to Ping An Insurance by the end of September. The company identified logistics and data centers as part of its investment focus in China going forward.
Local governments are taking action to avoid an office glut. The southern city of Nanning said last October that it would let offices and shopping centers be converted into housing if they meet certain conditions, such as providing educational facilities. This past April, the city greenlighted such a conversion of a property that had been approved for office and hotel space.
But China's housing market has its own problems. Flipping and other speculative deals have made prices increasingly divorced from actual supply and demand.
For developers saddled with heavy debt from years of pursuing scale -- China Evergrande Group is a prime example -- changes in the property market threaten to unleash dangerous cash crunches. A chain reaction of defaults in the real estate sector would, in turn, threaten a destabilizing blow to China's financial system.