High-quality development in China”s real estate sector requires not only price stability and better residential housing, but also a strategic reassessment of commercial real estate.
As the sector shifts from construction-led expansion to the management of existing assets, buildings are becoming an important link between urban renewal and asset management. Advanced manufacturing and modern services are emerging as new pillars of economic growth, raising demands for the quality, functions and operating capacity of urban space. Policies to expand domestic demand, upgrade industry and renew cities are creating new opportunities for the building economy — a development model where commercial properties cluster high-value businesses, generate stable tax revenues and spur regional growth.
For decades, China’s property sector mainly relied on new construction, stimulating extensive industrial chains across steel, cement, home appliances and furniture. Between 2018 and 2020, real estate value-added accounted for roughly 8.3 percent of China’s GDP. However, amid deep market adjustments, that share fell below 6 percent in 2025.
The traditional model is no longer sustainable because the supply-demand dynamics of housing have fundamentally shifted. Rapid urbanization previously added over 20 million people to cities annually, prompting massive residential construction. But as urban population growth slowed after 2018, incremental demand weakened, leaving the market in aggregate oversupply.
Real estate must therefore return to its core purpose: supporting people’s aspirations for a better life and providing high-grade physical space for industrial upgrading. China’s latest round of property-market regulation, launched in 2020, reflected a broader economic transition centered on technological innovation, industrial upgrading, high-quality development and stronger domestic demand, particularly consumer demand. The property sector should therefore support economic transformation and urban development as new sources of growth.
Over the past five years, China’s economic structure has continued to optimize. The five sectors recording the largest gains in their share of GDP — information technology services; leasing and business services; wholesale and retail; transport and warehousing; and accommodation and catering — all rely heavily on commercial real estate as operational hubs.
However, the commercial segment faces severe inventory pressures. Traditionally, commercial property relied on the rental spread, with developers acting merely as landlords collecting rent. Today, this passive model is obsolete. In first-tier cities, the average commercial inventory absorption period stands at 87 months, with Shanghai approaching 300 months. By the end of 2025, China’s office vacancy rate reached an estimated 26.7 percent. Transforming and optimizing these existing spaces has become an urgent priority.
Commercial buildings are also important physical carriers of consumption upgrading, industrial clustering and investment, and can support the expansion of domestic demand. At the end of 2024, the Central Economic Work Conference called for vigorous efforts to boost consumption, improve investment efficiency and expand domestic demand on all fronts.
As consumer demand shifts from basic goods to service sectors — such as culture, sports, healthcare, tourism and modern business services — high-quality physical environments and integrated facilities become critical. High-tech enterprises similarly seek integrated growth ecosystems rather than isolated offices.
Urban renewal policy reinforces this direction. The State Council’s urban renewal plan for the 15th Five-Year Plan period (2026-30) calls for the transformation and upgrading of aging neighborhoods and factory areas, underused industrial parks and inefficient buildings. The renewal of such buildings is not merely a matter of renovating structures. It requires reshaping their value and innovating operating models in response to new demands for space, enabling them to support industrial upgrading, expanded consumption and greater urban vitality.
Effective investment should not be confined to expanding manufacturing capacity; it must also build vibrant platforms for consumption, modern services and technological innovation.
Developing the building economy is also vital for local fiscal sustainability. In China’s fiscal system, property-related revenues — including deed taxes and land-transfer income — largely accrue to local governments. As the property market weakened, income linked to transactions, including deed taxes, land value-added taxes and land-transfer revenue, fell markedly.
To unlock the full potential of the building economy, market participants and policymakers should pursue coordinated reforms. Building owners should move from being asset holders to long-term operators of space, strengthening active management and their ability to incubate industries. Differentiated tax arrangements could raise the cost of persistently vacant or frequently traded commercial buildings while granting property tax relief to long-term operators with strong tenant performance. Financial support should also match longer operating cycles, including broader real estate investment trusts, issuances where conditions permit and preferential lending that extends from specific industries and enterprises to operators of industrial space.
At the same time, China should address structural imbalances in commercial and service-sector supply. Some areas face excessive inventories of industrial parks and office buildings, while involutionary competition has weakened commercial vitality. Services for households remain large in scale but insufficiently strong in quality, particularly healthcare, education and eldercare.
Urban renewal should improve the allocation of underused resources, including through reforms to coordinate State-owned assets, resources and capital, while fairer competition should support the healthy development of private businesses. Further opening of the services sector and innovation in service formats could improve high-quality supply.
Finally, commercial-building renewal should be integrated with broader urban renewal. Different types and locations of buildings require differentiated strategies. Depending on whether they are in city centers, district centers or community centers, commercial buildings could accommodate technology businesses, retail and hotels, cultural and sports uses, and rental housing, including apartments for skilled workers. Planning rules could offer greater flexibility, such as permitting additional commercial floor area for projects that provide public space or services.
The writer is an adjunct professor of economics and finance at the China Europe International Business School, and former head of the Statistics and Analysis Department of the People’s Bank of China.
The views do not necessarily reflect those of China Daily.