With domestic companies firmly at the helm of Beijing’s office market, we can expect Chinese firms to form an even larger part of the market going forward, while IT further boosts growth in the north, according to the results of our latest mid-year tenant survey of all Grade A office space in the city.

Map 1: Beijing Grade A Office MapSource : JLL Beijing Research

Chinese companies to further dominate market

Domestic firms maintained a strong hold on the market. Although growth from mid-2016 to mid-2017 was not as aggressive as that from mid-2015 to mid-2016, we continued to see mainland Chinese firms serve as the main source of demand across all submarkets. Domestic firms accounted for 61% of the Grade A market by end-2H17, increasing their presence in the market by a percentage point from end-2H16. While this paled in comparison to the 7 percentage point-leap in their take of the market-share from the previous year, domestic companies continued to outpace foreign firms. As this trend  deepens, domestic firms will make up an even bigger majority of the market.

Figure 1: Breakdown of Grade A Space by Country of Origin

Source : JLL Beijing Research

There are no current signs of a strong resurgence in foreign demand, but international firms did register positive growth in 2017, following a period of recession from 2015. Growth was much more modest than that of their Chinese counterparts, with the exception of German firms, which grew faster than their foreign peers at the market average. Nearly half (47%) of the space held by German tenants in Beijing is for the automotive industry, one of the few bright spots for growth for international companies in China.

IT sector to further grow north

Map 2 : IT Presence in the Beijing Office MarketSource : JLL Beijing Research

The IT sector overtook the professional services industry as Beijing’s second-biggest industry by Grade A office space in 2016 and continued this growth trend into 2017, with strong government support and an active venture capital environment. With Zhongguancun – the key IT hub in the city – at capacity, Wangjing and Olympic Area are well-positioned to drive growth in the north ahead. Large tenants ZTE and Baixin Bank (the joint venture between Baidu and Citic Bank) recently moved to Olympic Area, but Alibaba’s mammoth presence in Wangjing draws a multitude of start-up communities, including a number of tech companies operating inside co-working spaces. This strong base of IT and related companies will continue to bode well for demand momentum and growth in the north.

Finance Street to remain market-leader

Figure 2 : Breakdown of Grade A Space by IndustrySource : JLL Beijing Research

From mid-2016 to mid-2017, the finance sector remained a key source of demand, despite shrinking in market-share by a percentage point from the previous year. Driven by the increasingly high and unsustainable rent levels in Finance Street, the decline is mainly attributed to companies downsizing in Beijing’s most expensive submarket over the last year: firms have squeezed into smaller spaces, refusing to give up their prestigious office address given the importance of being close to regulators. This has led to a steady fall in the average space per company in Finance Street from mid-2016 to mid-2017.

At the same time, government-related entities such as the Silk Road Fund have focused on securing longer-term contracts in the last several months, demonstrating a renewed commitment to Finance Street despite the Asian Infrastructure Investment Bank’s (AIIB) future relocation to Olympic Area from Finance Street. As Finance Street persists as a key hub for finance and related industries in Beijing, this tenant group can be expected to support the tight-vacancy environment, enabling the area to maintain its market-leading position.

Note: Linda Yu, a manager with Beijing Research, contributed to this article.

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