People look at a building model at an expo in Beijing. Beijing's commercial real estate market will remain under downward pressure, according to industry observers. [Asianewsphoto]

Beijing's commercial real estate market, faced with an oversupply and rising vacancy rates, will remain under downward pressure in the second half of this year despite a strong recovery in the residential sector, industry experts said.

"On the back of a current supply glut in the Grade A office sector, depressed market conditions likely will persist through the remainder of 2009," said Alice Wood, director of the commercial property division in the Beijing office of UK-based property consulting firm DTZ Holdings PLC.

According to Jones Lang LaSalle (JLL), a global real estate consulting firm, six new commercial projects were completed in the second quarter in Beijing.

The new projects added another 408,300 sq m of new space to the Beijing market, increasing the total stock to 8.8 million sq m.

This influx of new supply pushed up the vacancy rate in the overall commercial market to 27.3 percent this quarter. The influx also helped push down rental rates.

According to the JLL report, overall average rentals in Beijing's office market stood at 214 yuan ($3.51) per sq m per month in the second quarter, down 4.7 percent quarter-on-quarter.

The rate of declines, however, slowed down, compared with the 8.3 percent drop in the first quarter.

Beijing's Central Business District (CBD) area, where the vacancy rate climbed to more than 35 percent, saw its rentals drop by 13.3 percent year-on-year, the biggest drop in the whole market, according to the Greater China offices of commercial real estate services firm CB Richard Ellis Group Inc (CBRE).

But due to significant demand from domestic firms, rental values in Beijing did not fall as much as those in Hong Kong and Shanghai.

In Hong Kong and Shanghai, high vacancy rates and suppressed demand have led to rental decreases of 10.2 percent and 8.9 percent, respectively, according to the JLL report.

In Beijing, domestic financial institutions, energy companies and media companies dominated demand for space this quarter.

The market welcomed several large transactions by domestic financial institutions and government regulatory bodies.

CBRE reported that the demand for high-quality office buildings is rebounding slightly, and that demand from large international firms with plans to expand their business in China is also picking up in Beijing.

"In the second quarter, we received many inquiries about renting office space from international firms," said Will Chen, deputy managing director of CBRE's Beijing offices.

But Julien Zhang, managing director of JLL Beijing, said office rentals in Beijing would drop further in the next six months.

"Although we are optimistic that demand is picking up in the market, a large amount of new supply in the next half year will drive the vacancy rate above 30 percent, thus pulling down rental rates," Zhang said.

In the retail sector, with global wealth continuing to evaporate, corporations and consumers alike have had to tighten their belts, leading many international luxury retailers to put their expansion plans on hold.

Beijing even saw a few retailers withdraw from the market.

In the second quarter, several projects scheduled for completion postponed opening dates, a sign that leasing commitments across the retail market remained sluggish, according to the JLL report.

But performance at mid-range shopping malls has remained relatively stable, showing that the fundamentals in China's retail market remain strong, according to the report.