Customised office fit-outs: way forward in China

Customised fit-out service is likely to be a new way to help office landlords attract new tenants and stand out amidst intensified competition.

August 19, 2020

Impacted by the COVID-19 pandemic, the office leasing market in Mainland China faced continuous challenges in the first half of 2020. Meanwhile, more projects entered the market, leading to more supply in many cities and further intensifying competition for landlords. Across both Tier 1 and Tier 2 cities, landlords of office buildings choose to reduce rents or extend rent-free periods in order to attract new tenants.

Figure 1: Office Supply Forecast (2020-2023)

Source: JLL Research, 2Q20

Customised fit-outs to attract new tenants

Facing the overall downturn and slow recovery of the office leasing market In the second half of 2020, landlords need to pay more attention to tenants’ potential needs and actively provide solutions accordingly. In addition to rental reductions and longer rent-free periods, landlords can offer customised fit-out services. Likewise, they can provide a portion of ready-to-use office space to tenants, as conventional rental decline become less effective in a highly competitive market. Based on tenants’ different needs, landlords can customise the colour and decor of office space, change the layout of meeting rooms and utilisation of public areas to create value for tenants in more suitable ways.

From a landlord’s perspective, customised fit-out services can help improve the overall environment of office space to be leased and effectively differentiate among the competition to increase rental income. For older office buildings, landlords can renovate and upgrade each unit’s office space to provide tenants with more convenient services and better experiences. For Grade A and premium Grade A office buildings, to fulfil the expansion demand of existing high-quality tenants, landlords can open up parts of reserved areas or customise existing public areas into places for specific purposes, such as town hall, exhibitions or shared meeting rooms, to provide more value-added services.

Lower initial capex and shorter preparation time

At the same time, many companies have adjusted their corporate budgets due to the economic impact brought by the pandemic. Under budget constraints, companies’ demand for office relocation was curbed with the consideration of fit-out costs. Tenants became more cost-sensitive and adopted more conservative strategies for leasing office space.

From a tenant’s perspective, customised fit-out services can lower the initial investment in fit-out expenses and shorten the preparation time between signing the contract and the official move-in. Some tenants with relocation and upgrade needs often prefer to renew their leases even at a higher rent instead of relocating, given huge capital expenditures involved. Therefore, customised fit-out serves as a low-risk and more flexible solution that can further mobilise tenants’ relocation demand while meeting their expansion and cost-saving requirements. For example, EBA Center in Shanghai began to offer fit-out services last year based on tenants’ customized needs and to be paid by instalments in order to reduce tenants’ initial investment, The service has successfully attracted tenants with different space requirements to relocate, and helped the project to reduce existing vacant space.

Meeting tenant demand and achieving a win-win outcome

Effective containment of the pandemic within China and orderly work resumption has released the delayed demand, and resultantly leasing activity has gradually started to pick up. Financial services remain resilient, and TMT sectors are still leading office demand. In JLL’s tenant survey of 110 TMT companies, over 70% have increased the number of employees by over 10% a year. Moreover, 10% of companies have increased the number of employees by over 100% a year.

Figure 2: Lease Term by Firm Size

Source: JLL Research, Office Space X Tech firms: A roadmap to comprehend and forecast tech firms’ unique office demand, Dec 2019

Therefore, start-up TMT firms may prefer office space with customised fit-out services to fulfil their rapid expansion requirements. If landlords and developers can provide customised services and cost-effective options in response to changes in market demand, in that case, they are likely to differentiate in a highly competitive market and secure new leasing demand more efficiently.

Under the highly competitive market, landlords of office buildings need to continuously focus on tenant needs and increase their potential to differentiate among competitors. Innovative, value-added services will enhance customer experience and create value for tenants, and landlords, who are flexible and innovative, will welcome new opportunities.