In Beijing, the oversupply of commercial space will force down rents and occupancy rates, says Rodman. This will increase the risk on defaults on bank loans to real estate developers and affect future real estate investment prospects. "As developers find it more difficult, there is a potential for some of them to turn to the strata-title market ( those sold and rented by different landlords by floor or unit, similar to condominium ownership models) or look for (institutional investors that buy an entire building)."

In contrast, in Shanghai, "companies are occupying the space," according to Macdonald. "The oversupply is by no means an accident. There are expectations for immense growth in Shanghai over the next 10 years, and having available office space for companies will be an essential part of ensuring the economy can grow."

Although tough times may still lie ahead, the government's stimulus package will spur growth in demand for office space by domestic companies, says Hu. Foreign enterprises investing in China, especially in sectors relatively unaffected by the recession such as renewable energy and pharmaceuticals, are expected to need office space in Beijing, while auto and electronic manufacturing will benefit from the increasing consumption in China in the long term.

"The huge amount of supply building up is not the main problem, rather the weakened economic conditions that have affected demand is," says Macdonald. "As with the rest of the world, China is putting immense effort into maintaining growth. It is widely believed these efforts will help to get the economy expanding again and once it does, demand for office space will return to normal." The central government's goal of making Shanghai an international financial center by 2020 won't hurt either. It should "further brighten the office market's long-term vision, although the current oversupply is not likely to be alleviated in the immediate short term," he says.

Over the next two years, 30 projects totalling more than 2.5 million sq m (27 million square feet) of mid-to high-end retail space will be launched, says Macdonald. "Given that the annual take-up volume between 2006 and 2008 was 800,000 sq m, vacancy rates should continue to rise over the next two years, especially given that the rate of expansion has slowed since the start of the year," he says.

"The amount is increasing and development is taking a longer term view. Although some projects have been delayed … the next couple of years are still expected to see supply schedules met," he notes. "The supply issue is likely to remain for at least the next three years."

Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.