Prime office space is in vast supply

For corporations wishing to hang their shingles in one of the mainland's most promising economic regions, it's a tenant's and buyer's market in Chengdu. The recent completion of grade-A office projects has overcorrected the undersupply, and with demand softening, developers and landlords are ready to do deals.

While the city's economy remains healthy, reduced demand for prime office space was recorded in the second quarter. James Shepherd, executive director of research and consulting for Greater China at Cushman & Wakefield, reports that 37,819 square metres were absorbed, 30 per cent lower than the quarterly average of the past five years. "Correspondingly, grade-A office effective rental declined 2.7 per cent [quarter-on-quarter] to 95.5 yuan [HK$116] per square metre per month."

There are a number of factors behind this, Shepherd says. "The economic slowdown dampened office demand of both domestic and foreign tenants. In addition, record-high levels of vacancy forced landlords to offer more competitive incentive packages."

Slowing growth has impacted foreign direct investment, which contracted by 13 per cent year-on-year in the first half of this year, Shepherd says, largely due to a decline in the industrial sector. 

On the other hand, the shift to tertiary industry in Chengdu's economy has seen financial players such as insurance and banking firms looking to purchase or lease high-quality premises. Cushman & Wakefield's report shows that professional services accounted for 44.9 per cent of recorded leasing deals in Chengdu in the first half.

Shepherd predicts this trend will continue. "Chengdu boasts excellent infrastructure, a vast market hinterland, an unrivalled talent pool, superb livability and the most developed tertiary sector of west China, which sets the city in a leading position in terms of attracting domestic and foreign investment, creating demand for office space. The very high quality of projects by international developers such as Swire Properties, Tishman Speyer, Kerry Properties, Wharf and China Resources can readily meet this demand.