State of the Occupier - Wuhan: Ground Zero

Wuhan has been pulled from the lockdown. The government is still monitoring whether or not people may leave to other cities. Currently around 95% enterprises resumed work full time.

Occupiers are asking for assistance in negotiations with their landlords to obtain a greater length of rent-free.

OCCUPIERS?
For occupiers who were in negotiations for renewal prior to the COVID situation albeit did not finalize the terms, they are now looking to reestablish the negotiations to consider the change in the market situation. For occupiers who were in negotiation for relocation prior to the COVID situation, they are for the most part either cancelling or delaying such plans. Those that are still considering relocation have realigned their strategy achieved reductions on OPEX.


LANDLORDS?
Landlords of non-government owned properties are beginning to prepare rent free policies. We observe that Landlords willingness to entertain these discussions are generally based on the respective tenant’s industry; notably, those industries most affected by the Coronavirus situation are more likely be at the negotiation table for rent reductions while those less affect by the Coronavirus situation are usually not being entertained by Landlords.
We also observe that one way to help solidify obtaining rent free concessions irrespective of industry would be to commence negotiation for renewal well in advance of expiration. In this case, we observe that landlords of non-government owned Grade A buildings may offer more than the normal offerings of 1-2 months rent-free.


DEVELOPERS / INVESTORS?
Some state-owned developers nullified rental obligations between February to April 2020 and adjusted rent down by 50% for 6 months thereafter for small to medium sized companies. For those renting properties not owned by a state-owned enterprise, the landlords are encouraged by the government to reduce rent for the tenants. There is no mandatory requirement on this front. Rent reductions, if applicable, shall be settled through negotiation between both parties.

Coworking and service office operators may face the risk that some small and medium-sized enterprises surrender their leased premises. This pressure on the coworking operators presents opportunities for occupiers to achieve better terms. While an operator’s financial position may be a concern for an occupier entering their facilities, we have noticed that if bankruptcy becomes the outcome for the operator the main landlord typically assumes ownership and operations thereafter reducing the perceived risk for the occupier.

Meanwhile, the Wuhan office market was experiencing vacancy rates of (+)30% prior to the COVID situation due to supply outpacing demand for the 3 years prior. We anticipate that the decline in demand due to the COVID situation will put further upward pressure on vacancy rates in 2H of 2020 when supply may come online. While some of those developments may delay delivery due to the situation, we believe it’s prudent to assume that it may fall short of alleviating the upward pressure on vacancy rates. In summary, we anticipate that Wuhan will continue to move further towards a tenant’s market. 

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