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Buildings go up and so do for-rent signs
October 13, 2009, Tuesday
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CHINA'S rapid economic expansion over the past decade turned the country into the place to be for multinational companies.
To accommodate the influx of international businesses, developers took out loans, land was cleared and construction sites and cranes dotted the skyline of every major city.
But when the financial crisis hit, many multinationals pulled their offices and employees out of China or moved to less expensive spaces, while the hordes of shoppers that retailers were expecting to flood the malls tightened their purse strings.
Meanwhile, construction continues.
How did this scenario evolve, and what are the commercial real estate industry's prospects?
How much space is vacant is a matter of debate.
Shirley Hu of real estate broker CB Richard Ellis predicts that by 2010, the supply of commercial office space will increase in Beijing by roughly 1.5 million square meters and in Shanghai by 1.9 million square meters, driving up vacancy rates to approximately 30 percent.
But vacancy rates in commercial real estate may be as high as 50 percent, says Jack Rodman, president of Global Distressed Solutions LLC based in Beijing, and senior adviser at Crosswater Realty Advisors, a Los Angeles-based real estate advisory firm serving institutional investors.
According to Rodman, calculations from brokerage firms often don't include strata-title buildings (those sold and rented by different landlords by floor or unit, similar to condominium ownership models), though some could be considered Class A commercial space; newly built buildings if they are not yet open to leasing; or nearly built buildings awaiting certificates of occupancy.
"These buildings are theoretically not open, but ... if a building can be brought to market in six months, then it's better to include it in the supply," he said.
The supply of Class A commercial office buildings in Beijing over the past two years increased an estimated 5.6 million square meters, Rodman points out.
The amount of space wasn't as worrisome during the boom years, between 2003 and 2007, when demand drove up the average annual absorption rate to roughly 465,000 square meters a year. China was hot, and everyone wanted in - from international investment banks and law firms to accounting firms and real estate brokerages.
"But for the last two years, you haven't had any of that," says Rodman. "I don't think there's been much net absorption at all. I believe there's a very large and very real problem here."
And it isn't limited to Beijing, he adds. "Shanghai's office market is as bad as this."
Corrections
Other cities are also struggling with high vacancy rates in commercial real estate that mirror those in the capital and financial center. "Hangzhou definitely has an oversupply of commercial property," says Wu Weiming, CEO of a commercial property developer in that city.
Commercial real estate rents began declining in Beijing and Shanghai in the third quarter of last year, says Macdonald. Leasing prices ("headline" or "face" rents) have dropped on average from 189.8 yuan (US$27.80) per square meter per month to 147.9 yuan, down 17.2 percent year on year. "That's quite a sizable correction," he says.
But in an effort to keep tenants and woo new ones, many landlords are signing leases offering 12 or more rent-free months on a five-year lease, so that net effective rents are down 40 percent to 50 percent in Beijing, according to Rodman, who has compiled photos of the city's empty office buildings in a lengthy slide show. Still, many buildings remain empty, he says.
In Shanghai, rents are "falling to levels not seen since the second half of 2006," says Hu. "We are beginning to see tenants position themselves to take advantage of market conditions and implement longer-term occupation strategies."
Stimulus
Finding occupiers for future retail property projects in Beijing during the current financial situation will be difficult, says Hu. But the government's stimulus efforts to boost domestic consumption will help ease the problem.
In Shanghai, the 70 million visitors expected for the World Expo opening in May 2010 will also help.
"However, forecasts including future prime retail projects for 2009 show that both Beijing and Shanghai will have a relatively larger supply compared with the last several years, with an estimated 1.39 million square meters for Beijing and 722,000 square meters for Shanghai," she says.
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.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. All rights reserved.)
To accommodate the influx of international businesses, developers took out loans, land was cleared and construction sites and cranes dotted the skyline of every major city.
But when the financial crisis hit, many multinationals pulled their offices and employees out of China or moved to less expensive spaces, while the hordes of shoppers that retailers were expecting to flood the malls tightened their purse strings.
Meanwhile, construction continues.
How did this scenario evolve, and what are the commercial real estate industry's prospects?
How much space is vacant is a matter of debate.
Shirley Hu of real estate broker CB Richard Ellis predicts that by 2010, the supply of commercial office space will increase in Beijing by roughly 1.5 million square meters and in Shanghai by 1.9 million square meters, driving up vacancy rates to approximately 30 percent.
But vacancy rates in commercial real estate may be as high as 50 percent, says Jack Rodman, president of Global Distressed Solutions LLC based in Beijing, and senior adviser at Crosswater Realty Advisors, a Los Angeles-based real estate advisory firm serving institutional investors.
According to Rodman, calculations from brokerage firms often don't include strata-title buildings (those sold and rented by different landlords by floor or unit, similar to condominium ownership models), though some could be considered Class A commercial space; newly built buildings if they are not yet open to leasing; or nearly built buildings awaiting certificates of occupancy.
"These buildings are theoretically not open, but ... if a building can be brought to market in six months, then it's better to include it in the supply," he said.
The supply of Class A commercial office buildings in Beijing over the past two years increased an estimated 5.6 million square meters, Rodman points out.
The amount of space wasn't as worrisome during the boom years, between 2003 and 2007, when demand drove up the average annual absorption rate to roughly 465,000 square meters a year. China was hot, and everyone wanted in - from international investment banks and law firms to accounting firms and real estate brokerages.
"But for the last two years, you haven't had any of that," says Rodman. "I don't think there's been much net absorption at all. I believe there's a very large and very real problem here."
And it isn't limited to Beijing, he adds. "Shanghai's office market is as bad as this."
Corrections
Other cities are also struggling with high vacancy rates in commercial real estate that mirror those in the capital and financial center. "Hangzhou definitely has an oversupply of commercial property," says Wu Weiming, CEO of a commercial property developer in that city.
Commercial real estate rents began declining in Beijing and Shanghai in the third quarter of last year, says Macdonald. Leasing prices ("headline" or "face" rents) have dropped on average from 189.8 yuan (US$27.80) per square meter per month to 147.9 yuan, down 17.2 percent year on year. "That's quite a sizable correction," he says.
But in an effort to keep tenants and woo new ones, many landlords are signing leases offering 12 or more rent-free months on a five-year lease, so that net effective rents are down 40 percent to 50 percent in Beijing, according to Rodman, who has compiled photos of the city's empty office buildings in a lengthy slide show. Still, many buildings remain empty, he says.
In Shanghai, rents are "falling to levels not seen since the second half of 2006," says Hu. "We are beginning to see tenants position themselves to take advantage of market conditions and implement longer-term occupation strategies."
Stimulus
Finding occupiers for future retail property projects in Beijing during the current financial situation will be difficult, says Hu. But the government's stimulus efforts to boost domestic consumption will help ease the problem.
In Shanghai, the 70 million visitors expected for the World Expo opening in May 2010 will also help.
"However, forecasts including future prime retail projects for 2009 show that both Beijing and Shanghai will have a relatively larger supply compared with the last several years, with an estimated 1.39 million square meters for Beijing and 722,000 square meters for Shanghai," she says.
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.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. All rights reserved.)
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