The vacancy rate in the Shanghai office market has dramatically increased in recent years, with the city now having enough vacant space to fill 34 fifty-story skyscrapers. One might easily assume this to be the result of weakening demand, but demand for Shanghai office space has not collapsed; it has instead failed to keep pace with the sheer volume of new supply. The market is oversaturated.
While the oversupply situation worsened dramatically in the recent five or six years, it has actually been long in the making. For nearly two decades more office projects have been commenced than completed
in Shanghai each year, 2023 being a rare exception. This long wave of construction expanded total office space to its current total of 19.4 million sqm, of which 4.22 million (about 22%) now sits vacant. Intense
competition among landlords, and migration of tenants to newer office buildings, have been the most noticeable results for the past five or so years.
Landlords in some areas have managed to keep vacancy rates low by offering tenants generous package deals containing major incentives. Four- to six-month rent-free periods, and rental rate reductions as high as 20% are not uncommon. The South Bund is one such area where the average vacancy rate remains relatively low at about 5%, but this only means that average vacancy in other areas must be even higher than the 22% citywide average.
Repurposing, Shanghai-style
In recent years high office vacancy rates have plagued real estate investors not just in Shanghai but in cities around the world, with some city office markets failing to completely recover from pandemic-driven work-from-home, economic decline and urban exodus. So it might be of interest to many to know how Shanghai’s office building owners are handling excessive vacant space, and we’ve listed below some of their strategies.
1) Co-working
In Shanghai the vacant spaces being repurposed tend to be older buildings that fail to compete with newer ones, and the wide availability of these under-utilized old buildings means opportunities for co-working center operators. To name just one successful example, Jinghe YueJie Pingwu SPACE in Changning District has transformed an outdated building into a modern co-working space that is attracting all kinds of modern creative companies. Units are leased out at fixed monthly rents that includes benefits such as meeting rooms, coffee and tea and access to learning and networking events. Such projects are often able to achieve occupancy levels of 85%-90%.
2) Radical Repurposing
Some old office buildings are being repurposed into totally new formats, one example being the old Zhongxing Trade Building on Zhenping Road. It has been transformed into Shanghai Shenyang Wangnianhui, a mixed-use senior living center with medical clinics, dining areas, senior apartment housing and recreational and social spaces. Such repurposing of old office buildings in service of a growing class of senior citizens is a sustainable business strategy for China’s aging society.
3) Vertical Ecosystems
Another innovative strategy is the creation of vertical industry ecosystems within single office buildings. Instead of leasing to unrelated tenants, landlords focus on companies from a specific sector. A leading example here is the Asia Building, which hosts businesses in the entertainment, culture, media and event planning industry on its upper floors, and has live performance venues and rehearsal areas in its lower 11 floors. The building is able to function as a complete ecosystem that fosters synergy among tenants, increasing long-term tenant retention while also garnering government and industry support.
4) Urban Renewal and Talent Apartments
Apart from traditional office conversions, developers are working with the city to transform aging commercial buildings into modern, attractive, mixed-use properties and high-quality talent apartments. One of many examples is the Yongsheng Building in the North Sichuan Road business district, which was originally the site of the Shanghai Yongsheng Pen Company. The district government is working with Shanghai Electric Group Company to redevelop it into the Shanghai Electric Bund Talent Apartments, which will eventually offer 224 fully furnished serviced apartments with various amenities, all designed to accommodate the working professional lifestyle. These projects not only help resolve the excess vacant space problem but also support Shanghai’s goal of building a more balanced urban environment for talented workers.
5) Commercial-to-Serviced Apartment Conversions
A similar approach is to convert under-performing office buildings into high-efficiency serviced apartment hotels, like the Suhe Rebetting Serviced Apartment Hotel in Putuo District. This former office building has been repositioned to offer longand short-term rental flexibility and modern amenities in a neighborhood that itself offers many lifestyle options. Serving both business travelers and professionals seeking flexible urban accommodation, the project is well positioned to sustain a high occupancy rate.
