As the focus of economic development policy turns towards the service sector and white-collar jobs, the total demand for high-quality office space will grow. Demand from domestic companies has already reached a tipping point and they are now the primary driver of the office market. Office space demand in China60 is focused on Tier 1.5 cities, where huge business activity and middle-class expansion are supporting the growth in high-value services. Oversupply has become an issue, but Tier 1.5 cities have considerable potential to absorb excess space over the medium term.
China's Grade A office market is still overwhelmingly concentrated in China's Alpha cities (Shanghai and
Beijing) and Tier 1 cities (Guangzhou and
Shenzhen), where nearly two-thirds of the national stock is located. Most of the remaining stock is in China60's Tier 1.5 cities, which benefit from access to professional skills and the growing demand for high-value financial and business services from a considerable volume of corporations and middle-class households.
The development of office markets in most Tier 2 cities is some way off due to the limited presence of professional skills. Talent continues to gravitate to the larger cities and, while there are some exceptions to this trend (e.g. those who work in large national companies or state-owned enterprises), the brain drain from smaller cities will remain a major constraint to the expansion of Grade A occupiers beyond the Tier 1.5 cities.
The balance of office market activity has continued to shift steadily from coastal cities towards the inland regional powerhouses.
Chengdu has retained its position as China60's premier office market; the city has the largest Grade A office stock among the China60 and is the preferred option for corporates seeking regional offices to serve West China.
China's Tier 1.5 cities are expected to consolidate their positions as major office hubs, underpinned by strong corporate activity, a growing volume of middle-class households, business-friendly operating environments, access to well-educated talent pools with good professional skills, and the availability of high-quality office accommodation.
Chengdu is predicted to hold its position as the primary office hub for West China, with
Wuhan growing in status as the main office hub serving Central China.
Hangzhou will solidify their roles, benefitting from strong connectivity to Beijing and Shanghai respectively.
Chongqing, Nanjing, Xi'an and
Shenyang also have the ingredients to support major office functions.
The Grade A office stock in Tier 1.5 cities has more than doubled every three years and recent stock increases have led to concerns about oversupply, with as much as half of Grade A space currently vacant in some Tier 1.5 cities. Nonetheless, Tier 1.5 cities have considerable potential to absorb this excess space over the medium term, as these cities grow into their 'new skins'. Based on the forecast growth in financial and business services, Tier 1.5 cities are projected to require 19 million square metres of Grade A office space by 2025, which is nearly three-times the existing stock of 7 million square metres.
Since 2012, domestic private companies have become a much more visible driver of office demand. As domestic companies expand and upgrade their space requirements, demand for Grade A space is already hitting a tipping point, and will contribute most of the demand for an additional 50 million square metres of Grade A offices by 2025.
What is becoming evident is the breadth and depth of demand from the domestic private sector … from financial services, professional services and business processing, through to technology, telecoms, e-commerce, creative industries, healthcare, life sciences and retail brands. As the Chinese economy transitions to service sector-led growth in the future, domestic corporations will continue to multiply and expand, while also upgrading their office facilities to improve their corporate image and to retain staff.
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