Student Question:
Hello Master, I currently operate a restaurant business in Shenzhen. We’re working in an environment where China is facing economic pressure from the United States. Domestic demand is weak, and commercial space is oversupplied.
Will commercial rental prices come down? Besides looking for bargain deals and exploring profit-sharing arrangements with landlords — should we be avoiding new openings and long-term leases for now? Currently, I’m maintaining profitability by keeping rent at roughly 19% of revenue or below.
Master Chi’s Response:
- The demand shortfall is primarily an external demand problem. If your business serves everyday consumers rather than high-end spenders, the impact is relatively limited. What we’re seeing now is a sharp reduction in stable, high-income jobs. Tencent, Baidu, Alibaba — all cutting headcount. Finance sector workers are taking pay cuts. And this isn’t just China — it’s happening globally.
Any institution that once provided stable, high-income employment is aggressively cutting costs and reducing leverage. The people attached to those jobs were the ones sustaining mid-to-high-end consumption. In total consumer volume, they were always a small fraction — never enough to sustain a brand, a company, let alone an entire industry.
I don’t believe we’ll see a significant drop in commercial rents — and frankly, it won’t be permitted to happen. There was a recent case in Shenzhen where a developer proactively offered to cover 600,000 RMB of a buyer’s down payment, and it was immediately shut down. Because this is never just about one individual. Once that kind of precedent forms, it stops being a matter of personal gain or loss — it implicates an enormous web of debt and leverage.
The bubble at every level is genuinely large right now. Some will fall. But if your own operation is lean and your leverage ratio is low, you’re in a relatively safer position. The first to collapse will always be the most over-leveraged — people who cobbled together down payments from every source imaginable just to stay afloat.
A useful reference: compare your current property’s rent to what it was in 2019. How much has it actually dropped? Survey multiple properties across different districts and build a comparison table. Nothing hit industries harder than pandemic-era restrictions. If rents didn’t fall sharply during that period, the remaining room to fall now is limited. If the data confirms limited downside, then this is actually an opportunity — locking in long-term contracts at current rates becomes the smarter move.
- This groundwork is yours to do — the thinking above is the framework. The bold among you will go further: expand counter-cyclically, aggressively locking in low long-term rents and reducing long-term labor costs, taking advantage of low interest rates. That said, it all depends on your individual situation and expectations. The biggest risk in expansion is running out of capital before you reach full profitability — or interference from non-economic factors.