Navigating Beijing’s office market through the Covid-19 downturn

To help stakeholders make sense of this challenging time, we delve into the Beijing office market’s demand structure, rental patterns, and key perspectives.

September 24, 2020

Covid-19 has turned our lives upside down, but it is not the cause of the current downturn in the Beijing office market – yet, at the same time, we cannot ignore that the pandemic has made the situation more challenging.

While supply used to be a bigger focus for the market, demand has now become a primary focal point. Meanwhile, fallout from the virus has further compounded pressures from the slowing economy. To help investors and major stakeholders make sense of this challenging time, we delved into the market’s demand structure, rental patterns, and key perspectives in our latest white paper, Navigating Covid-19: The Beijing Office Market Explained.

The demand story

We identify the demand structure of the market as comprising Fundamental Demand, Momentum Demand, and Follower Demand. Fundamental Demand serves as the bedrock of demand due to its stable nature; Follower Demand helps to pad out the market; and Momentum Demand has always been the driver of growth. Since 2014, there have been several waves of Momentum Demand continuously fuelling the leasing market: P2P, IT, and the sharing economy (please refer to our newly released white paper for a more detailed explanation).

Figure 1: Overall Demand Structure Breakdown

Source: JLL Research

However, in 2019, the market saw a lack of Momentum Demand, putting downward pressure on the market and leading it to enter a downturn by year-end. Although the virus was not the trigger for the slide, it has since quickened and steepened declines in 2020.

Still, based on our research and data collections, we see ample Fundamental Demand (51%) stabilising the market – allowing Beijing to outperform other competing markets. Future sources of Momentum Demand are expected to come from both policy-driven and virus-driven opportunities: hi-tech, new infrastructure, wealth management, online gaming, healthcare, and insurance. These industries will support a recovery in the market and eventually lead to new growth opportunities.

Rental narrative

Rents are falling in the Beijing office market. To understand rental movements during this period of adjustment, we can dissect a market cycle into four key phases: Rising Market, Downturn Market, Market on the Turn, and Growing Market. We determine the current market to be a Downturn Market, and thus rents are expected to correct further before rebounding. That said, rental movements in each submarket will respond differently to market dynamics and government policies.

Investment opportunities

We surveyed more than 50 key players, including foreign entities (40%), SOEs (36%), and private domestic companies (24%). The majority of respondents (72%) believe that the market is now facing a downturn, with the other majority (61%) worrying more about the slow economy than the virus (30%), underscoring the importance of fully understanding the demand story. However, investors should not be deterred as a new window of investment opportunity is emerging in the current downturn. Healthy occupational demand is capable of supporting a steady market recovery and eventual growth. Meanwhile, more favourable market conditions, including greater room for negotiation and a looser monetary environment, is further providing support for investors.

Despite all that we have been through with Covid-19, market stakeholders and participants generally remain confident about the future of the Beijing office market, believing that recovery is not too far off on the horizon..

For more, download our newly released white paper here.