Chinese Office Landlords Offer Free Furnishings Amid Economic Squeeze

The Central Plaza and Clerys Quarter commercial developments in Dublin are facing economic challenges due to the impact of the pandemic, hybrid working, and the cost-of-living crisis [01714aad]. The Clerys Quarter redevelopment has faced construction delays and is currently in a legal dispute with one of its retail anchor tenants, Flannels [01714aad]. The Central Plaza development, which includes office and retail space, had secured WeWork as its anchor tenant, but WeWork recently filed for bankruptcy in the US [01714aad]. Both developments are facing uncertainties in terms of attracting shoppers, businesses, and footfall [01714aad]. However, industry figures remain cautiously optimistic about the future of these developments, as consumer spending has held up well in Ireland and the office market is expected to stabilize in the coming years [01714aad].

In China, the office market is experiencing significant challenges, with landlords in Shanghai offering free furnishings to attract tenants facing budget constraints [131f3d50]. This trend comes as competition intensifies and rental fees decline, with average office rent in Shanghai falling 2.7% to 7.61 yuan (US$1.07) per square metre per day [131f3d50]. A recent survey of 237 corporate tenants revealed that one-third cannot afford to furnish offices, prompting landlords to consider further discounts to retain tenants [131f3d50]. The vacancy rate for premium office buildings in Shanghai is expected to exceed 24% in the second half of 2024, up from 21.2% in June, as 1.58 million square metres of new grade-A office space entered the market in 2023, marking an 87% increase from the previous year [131f3d50]. Despite these challenges, 38% of surveyed companies plan to expand their office space by 2026, with cost savings being the primary reason for relocation [131f3d50].

The commercial real estate markets in the US and China are facing headwinds, which is a cause for concern in a higher-for-longer rate environment [47eb5fc7]. Singapore's United Overseas Bank (UOB) acknowledges these challenges but remains optimistic about the ASEAN region [47eb5fc7]. UOB cites investment flows in new economy areas such as sustainability, as well as the region's low unemployment and robust consumption [47eb5fc7].

The US housing market is currently facing significant challenges, with a decline in existing home sales, rising mortgage rates, and limited inventory [9b749437]. This has led to reduced construction by homebuilders and a drop in apartment construction [3c43732a]. The subdued residential construction is expected to limit economic growth, although not enough to trigger a recession [3c43732a]. Homebuilders are cutting back on production plans and confidence among builders is declining [3c43732a]. Multi-family housing starts have also seen a drop-off, signaling a potential drag on economic growth [3c43732a]. The recent surge in mortgage rates has had a negative impact on the housing market, with affordability becoming a major concern [9b749437]. Despite these challenges, the US economy is expected to show strong growth in the third quarter, with retail sales exceeding expectations and consumers planning to spend more this season [9b749437]. However, there are concerns about the strength of the labor market and consumers in the face of high borrowing costs [3c43732a]. This confluence of factors may offer investors some respite from the hot economic data, but it also raises concerns about the overall health of the housing market and its impact on the economy and investors [3c43732a].

The challenges facing China's economy are abundant; however, China's economy was able to record solid growth in Q3. Incorporating Q3 data into China's growth prospects for this year leads us to believe China's economy could reach authorities' official growth target of 5%. With that said, China's fundamental and structural problems have not disappeared with just one quarter of solid growth [7409ca5d].

Many financial market participants are looking over their shoulders wondering what could be the next catalyst to drive rates higher. What might we see in the rates market, given the conflict in the Middle East and potential inflation drivers from higher commodity prices and overall wartime expenditure from the federal government? [7409ca5d].

Commercial real estate in China is facing problems similar to the residential sector, with rising vacancy rates and declining rents. The legacy of Covid lockdowns and quarantines, as well as the trend of remote work, have contributed to the reduction in demand for office space. Office vacancy rates have increased in major cities such as Beijing, Shanghai, Guangzhou, and Shenzhen. Rents have also dropped, raising concerns about the financial health of commercial real estate developers. These issues further compound the existing economic challenges faced by China, including declining exports, the collapse of the residential real estate sector, and a significant debt overhang. The rise in office vacancy rates adds to the strain on China's financial system and hampers Beijing's efforts to stimulate private investment spending [2b418df9].

In Shanghai, the office market is experiencing weakness, leading to an increase in vacancies and a decrease in rental prices. Large corporate tenants are relocating offices to less developed areas in order to cut down on rental costs [87bfaca2]. In the decentralised market, three new office buildings unleashed 220,700 square metres (7,535 sq ft) of space in the three months ended June, driving the vacancy rate to 30.1 per cent [87bfaca2]. Tenants could request discounts as steep as 50 per cent if they sign long-term leasing deals for non-CBD office space [87bfaca2]. Despite these challenges, Shanghai's economy grew by 4.8 per cent in the first half of 2024, lower than the national average of 5 per cent [87bfaca2]. Shopping malls in Shanghai saw a recovery in the second quarter, with the vacancy rate for the city's primary market sliding to 9.2 per cent in June [87bfaca2]. Prices of newly built homes in Shanghai rose by 0.4 per cent and pre-owned flats by 0.5 per cent, bucking the downward trend in mainland China's residential property sector [87bfaca2].