In recent news, the vacancy rate of commercial buildings in first-tier cities has approached or exceeded the 20% warning line, prompting Shanghai to introduce the country’s first specialized regulations for the renovation of commercial buildings. Analysts believe that with China’s economic downturn, even five-star hotels have resorted to setting up street stalls, indicating a situation that cannot be sustained for long. The so-called “commercial to residential conversion” is aimed at helping businesses clear their inventory, but with the overall economic decline being a major trend, the Chinese Communist Party is increasingly unable to restore the situation.
The Shanghai government released the “Implementation Opinions on Promoting the Renovation and Upgrading of Commercial Buildings” on July 29. It is the first adjustment made by a local government since 2017 to the ban on “commercial to residential conversion.” The document encourages commercial buildings to expand their functions based on their own circumstances, such as renting out rooms for residential purposes, educational training, elderly care, childcare, culture, and sports activities.
Although the opinions allow for leasing, the sale of commercial buildings for residential purposes is still not permitted. However, the policy direction is clear. A Xinhua Finance report describes this as a significant moment for Shanghai, as it marks a breakthrough for the “commercial to residential conversion” freeze that lasted for eight years. This term refers to the phenomenon of converting properties originally designated for commercial use (offices, apartments, shops, etc.) to residential use.
Since June, a number of five-star hotels in China have incorporated “street stall takeouts” into their daily operations. For example, Noble International Hotel in Zhengzhou offers items like egg rolls priced at 2 yuan each, echoing the slogan “5-star craftsmanship, street prices.” This adjustment reflects the current economic struggles forcing businesses to adapt to survive.
Independent commentator Zhu Ge Mingyang stated that both the rental of commercial buildings and five-star hotels resorting to street stalls are symptoms of China’s economic downturn. He emphasized the irreversible decline in population and consumer spending levels, contributing to the challenging economic conditions faced by businesses.
According to research by Knight Frank, a UK-based real estate consultancy, the vacancy rate for Grade A office buildings in Shanghai rose to 23.2% in the second quarter of 2025, compared to 22.2% in the first quarter. This trend signals a challenging market environment characterized by oversupply.
Similarly, reports from Cushman & Wakefield and Savills plc show that Shanghai’s Grade A office buildings are experiencing high vacancy rates. This heightened vacancy situation is a concern for the industry, as vacancy rates exceeding 20% indicate oversupply, increased financial risks, and potential asset depreciation, leading to a downward spiral of high vacancy rates, declining rental prices, and devaluation of assets.
Experts have set the ideal vacancy rate between 5%-10%, indicating a balanced supply-demand relationship and a healthy leasing market. When the vacancy rate exceeds 10%, it suggests market pressure but still manageable levels of absorption.
In a recent interview with a Japanese political commentator familiar with China’s financial and political systems, Huang Kai highlighted that the actual vacancy rates may be higher than reported figures. He noted that the expansion of commercial building usage is primarily to help developers clear their inventory, as maintaining the current restrictions would exacerbate financial challenges for Chinese real estate enterprises.
The situation is also worrying in Shenzhen, where the vacancy rate for Grade A office buildings could surpass 45% in 2025 due to a surge in supply and intensifying market competition. With nearly 8 million square meters of new supply projected in the next five years, the market faces significant pressures.
Notably, Beijing, Shanghai, Guangzhou, and Shenzhen are all considered first-tier cities in China, serving as crucial hubs in the nation’s economic and social framework. These cities play vital roles in terms of GDP, finance, and foreign investment concentrations. They often serve as policy testing grounds.
In the second quarter of 2025, the vacancy rate for Grade A office buildings in Beijing fluctuated within a range of 16%-19%, with rental rates continuing to decline. Similarly, Guangzhou reported a 15% vacancy rate for Grade A office buildings, marking a 16-quarter decline in rental prices. These trends are indicative of the overall pressures felt across the commercial office market.
In summary, the “commercial to residential conversion” ban implemented in 2017 has significantly impacted the real estate market in China, with declining sales volumes and growth rates consistently negative. From 2018 to 2024, the sales revenue in the commercial property sector declined from approximately 13 trillion yuan to 320.8 billion yuan, representing a drop of around 75%.