Leasing demand has recovered faster than expected, owing to the quick resumption of economic activity and the release of pent-up demand. Net absorption in H1 2020 reached 900,000 sq. m, an increase of 31% y-o-y, underpinned by a gain of 110% y-o-y in Q2 2020. Cities such as Nanjing, Hangzhou, Ningbo, Chengdu and Chongqing saw vacancy rate decreasing thanks to the quick recovery of demand.

Third-party Logistics (3PL) firms and e-commerce platforms remained the dominant sources of space take-up, accounting for more than 80% of leasing demand this quarter. Demand for cold storage accelerated, driven by growing requirements from fresh food and pharmaceutical retailers, along with central kitchens.

Selected occupiers, particularly those in the apparel and sporting goods sectors, have adopted tight cost control measures since the onset of the pandemic. This has led several such groups to consider consolidation and relocation options in major city clusters.

Rents remain resilient in tier I markets and nearby satellite cities. In mid-western markets, landlords have prioritised filling up occupancy over raising rents due to short term oversupply. As a result, overall rents fell by -0.6% q-o-q in Q2 2020.

The current supply wave is expected to continue through mid-2021, with nearly 6.45 million sq. m. of new space to be delivered in the next 12 months, 40% of which will be in West and Central China. Vacancy is expected to peak in or around the middle of next year and then trend downwards. While rents are expected to remain flat in H2 2020, those in tier I and satellite cities are likely to achieve 2-3% annual growth.

With logistics having been most resilient sector since the onset of the pandemic, recent months have witnessed the formation of several logistics-focused funds targeting investment in this asset class. Although activity among foreign investors has been constrained by travel restrictions, many buyers retain a strong appetite for logistics properties.