Office Buildings in China Offer Cheaper Rent, Subsidies as Skyscrapers Sit Empty

China’s biggest cities are seeing a growing array of gleaming skyscrapers that are barely half-full, trigging more landlords to cut rents.

A price war is spreading among offices, which are offering ever lower rents to retain tenants eager to move to cheaper towers. Others are resorting to giving out subsidies to lure back companies.

China’s office market predicament stems from an economic slowdown and a swelling supply. Major cities that were immune to challenges weighing on the commercial real estate sector abroad — such as rising interest rates and work from home — are now facing the strain. That’s adding to woes for developers and investors still contending with an unprecedented housing slump.

At Wangjing Soho, a landmark tower in Beijing that once thrived with internet companies, vacancies rose to 43% in June from 40% six months earlier, landlord Soho China Ltd. reported. Its smaller Qianmen Avenue Project near Tiananmen Square is 37% unoccupied, up from 33% six months earlier.

In financial hub Shanghai, 47% of Shui On Land Ltd.’s Ruihong Corporate Avenue was empty despite it being close to the prestigious Lujiazui central business district. In central Wuhan, the 330 meter-high Fortune Center, the city’s third-tallest building, lies 39% vacant, according to owner Yuexiu REIT.

“Insufficient leasing demand under economic weakness is a systematic issue hindering an office recovery,” said Lu Ming, a research director at Colliers International Group Inc. “When vacancy stays at an elevated level, such as above 20%, it’s hard to see office rents reaching a bottom in the near term.”

It’s not just individual buildings that are emptying. Beijing’s city-wide vacancies jumped to 20.6% in the second quarter, the highest in at least 15 years, Colliers data show. In suburban Tongzhou, an emerging financial district that sought aspiration from London’s Canary Wharf, 65% is empty, Cushman & Wakefield Plc said.

Rent competition has spread across the capital from a few business zones, Lu said.

Shanghai office vacancies climbed to 21.5% in the third quarter, the highest in about two decades, according to CBRE Group Inc. They risk rising further this year on a supply pipeline that’s set to be the highest in five years.

The weakness is weighing down company stocks. Shares of Soho, whose major assets are nine office towers in Beijing and Shanghai, have tanked more than 80% since a high in 2021 and the company warned that rents are heading in a “downward trajectory.”

Even those faring better are bracing for headwinds. Hang Lung Properties Ltd., which still sees more than 80% occupancy in many of its mainland offices, also warned during earnings about the competition in the market and potential impact on business. Its shares have dropped about 36% this year.

CapitaLand Investment Ltd, a Singapore-based property asset manager and investor, said during earnings in August that it’s seen a drop in rental rates and net property income in China. Occupancy was down to 79% in the second quarter of this year compared with 82% a year ago.

In Shanghai, cheap rent alone isn’t enough to entice new tenants. Some owners have started to provide free fit-outs or even cash subsidies, said Jacky Zhu, a senior director of office leasing advisory at Jones Lang LaSalle Inc.

Some owners are cashing out. Global asset manager BlackRock Inc. sought to offload a Shanghai office complex at about 30% discount to its purchase price, and a major state-owned landlord offered to sell most of its office buildings in the city for at least 30 billion yuan ($4.3 billion), Bloomberg reported earlier this year.

On the tenant side, some are taking steps to save costs. KPMG LLP in March trimmed space in Plaza 66 in downtown Shanghai, and moved a number of employees to the suburban Hongqiao Vanke Center, according to people familiar with the matter.

Across China’s major cities, net absorption of office space — a measure of occupancy — has only recovered to less than half of the pre-pandemic level in the first half, according to CBRE.

Weaker leasing demand has prompted developers to delay the construction and delivery of new stock. Some owners are considering selling upcoming supply or converting it to alternative use, CBRE said.

The global real estate agency predicted in March that net absorption of offices in the country would bottom out at 4 million square meters this year, a level last seen in 2019. It has since lowered the estimate to 3 million square meters, which would push office vacancies to 26.3% at the end of this year, up from 26% estimated earlier.

The backdrop to the slump is an economy that’s at risk of missing the Communist Party’s 5% growth goal this year. China last month unveiled a sweeping policy campaign to stimulate the economy and achieve the target, including a commitment to make the property sector “stop declining.”