The Superblock Story: Beijing’s Bold Business Hub

The Superblock Story: Beijing’s Bold Business HubNew mega-office cluster to transform skyline as "network effect" swells

In a series of high-profile land auctions in Beijing, the CBD Core Area attracted interest from a broad swathe of major industry players. The majority of the 17 land plots were auctioned off from 2010 to 2012 to domestic finance heavyweights such as CICC, CITIC, CIFCO, CIC2 and China Life. As the early market-movers in the area, these players were the first to commit to self-use space for future headquarters use. This encouraged others to follow suit and pre-commit to space in the area. Interest from Asian conglomerates was also relatively high; Samsung and Charoen Pokphand Group will be among the biggest foreign names to have a headquarters presence in the area. Some well-known developers will also be here, such as Hong Kong Land and Sino-Ocean Land. Land plots on average sold for RMB 20,536 per buildable sqm. Centrally located, available land parcels have been scarce ever since, underscoring the significance of the CBD Core Area as the last major land supply in a central area.

To ensure high-quality projects would be built to promote Beijing as an international commercial centre, regulations required that space be set aside for headquarters use and restricted any onward sale of a property within 20 years. This has led nearly a third of the space in the CBD Core Area to be designated for self-use, reserved for company headquarters. As of today, 80% of this self-use space has been taken up by mainland Chinese companies, forming an important headquarters cluster for the top names in Chinese finance. A further 43% of the built area will be leased on the open market and marketed to finance and professional services firms, both foreign and domestic. The remaining 27% of the area is expected to be used for non-office purposes, including retail and hotels. Two small land plots in the area remain unsold. Construction on four sold plots has yet to begin. Figure 2 illustrates the results of these efforts.

Beijing’s central business district is in the midst of its largest development stage ever, catapulting it into national and global visibility. Sitting along the Third Ring Road – a major artery just east of the city centre – the last big superblock of the city’s CBD is taking shape with China Zun acting as the beacon. Set to reach 528 metres into the sky, it will become the tallest building in Beijing upon completion. Fast-forward to the 2020s and this mega-expansion of the CBD – or the CBD Core Area – promises to double the present amount of Grade A office space in the CBD when everything is built with a total of 1.8 million sqm of supply1. The new stock will relieve the shortage of centrally located office options for companies in Beijing.

In the CBD Core Area, planned building and design features represent a continued upward progression in building quality standards for Beijing. Some examples include the possibility of true dual power sources and improved technologies for better airflow and filtration. Smart technologies are expected to enhance the functionality of buildings, with security access systems that plan to use facial recognition incorporating artificial intelligence. Sky gardens will put the health and wellness of occupants first and foremost, while new retail and hotel amenities enhance the commercial dynamic of the area. Apart from these features, many buildings will offer generous ceiling heights that match the highest of global standards. In less than half of the time taken to develop the earlier parts of the CBD – previously an industrial zone as recently as the 1990s – the CBD Core Area is expected to redefine the Beijing skyline as 18 buildings come online from 2018 to 2025 and beyond. Ambitious plans to build underground car tunnels and pedestrian links, in addition to a future new CBD metro line, will boost connectivity and help another 200,000 daily office workers, brought in by these new buildings, efficiently commute in and out of the area. Successfully executed, the CBD Core Area will allow for a critical mass of professionals and decision-makers to be in one place, boosting their "network effect" – a key ingredient in Beijing’s path towards becoming a truly global city.

Government-led project starts with a bang

1. All floor area measurements are subject to final confirmation and government approval upon completion. 2. CICC: China International Capital Corporation Limited, CITIC: China International Trust and Investment Corporation, CIFCO: China International Futures Corporation Limited, and CIC: China Investment Corporation.

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0%

50%

100%

2012 2017Leasable Self-use

Note: *Breakdown illustrates proportions of space only, not locations for the different uses of space.

Source: JLL Research, PDM

Figure 2: Planned Uses for CBD Core Area*

Self-useLeasableNon-office Use

Figure 1: Self-use Expectations for the CBD Core Area

Change of plans

Source: JLL Research

Self-use plans have been revised downward over time, compared to the original intentions. To date, self-use plans have fallen by 15 percentage points and have the potential to fall further, meaning that more of the space could enter the leasing market.

N

3

CBD

Other Submarkets

CBD

Other Submarkets

CBD

Other Submarkets

CBD

Other Submarkets

The CBD Core Area is a unique opportunity to have a blank slate for development in the centre of the city. The amount of development that is now possible in the centre will allow the office stock in the CBD to jump from 25% of the total Grade A office space in Beijing to 40% by 2025. This is the opposite of most global cities in the world where ample space for new office development tends to be further away.

The ultimate meeting place for business

Figure 3: Beijing Grade A Space - 2017

Figure 4: Beijing Grade A Space - 2025 (Forecast)

Source: JLL Research

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The CBD Core Area will cement the role of the area as an elite decision-making hub, as leaders in the finance and professional services sectors meet face-to-face on a regular basis. Close proximity without the need for intracity transportation will promote efficiency as well as a free flow of ideas and information to spread among professionals. Strong networks will become possible, on the scale of those in the top global financial centres in the world. Within New York, London, and Hong Kong, key decision-makers in high finance, for example, are situated within a 30-minute walking distance of one another3. While we may work in an increasingly virtual world, decision-making still happens face-to-face, especially in Beijing, where building and maintaining relationships are essential to business.

The expansion of the CBD is an attempt to bring about these key network advantages in a Beijing context, where such connectivity is lagging behind other leading global cities. Although Finance Street has made strides in this area, its success is more specific to state-owned finance companies that need to be close to regulators. In building upon the "network effect" of Beijing, the CBD Core Area will lead the charge for more industry groups, further diversifying the area and attracting movers and shakers from strong professional networks into one, walkable radius.

The CBD Core Area will cement the role of the area as an elite decision-making hub.

3. Special thanks to Dr. David Meyer at Washington University in St. Louis for his insights on global network effects. 5

Analysing Demand in the CBD

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IT/High Tech

27%

Finance Professional Services Real Estate Manufacturing Other

22%

12%

9%

5%

25%

-8,000 -6,000 -4,000 -2,000 - 2,000 4,000 6,000 8,000 Computing/Technology

BankingBiomed/Biotech/Pharmaceuticals

Engineering ServicesMining

UtilitiesConsumer Goods & Retail

ConstructionCo-working/Serviced Office

HealthcareLogistics & Distribution

Media & CommunicationOther

Professional & Business ServicesReal Estate

Travel, Transportation & StorageWholesale Trade

Aerospace & DefenceFinancial (Non-Banking)

Manufacturing

Finance IT Professional Services Manufacturing Other

37%

36%

38%

21%

18%

7%

4%

10%

19%

3%

8%

8%

33%

28%

28%

2015

2016

2017

36% 25% 21% 18%

56% 27% 14% 3%

Finance Manufacturing Professional Services OtherChina Europe Americas Asia (excl. China)

The CBD-occupier profile is shifting. Office tenants from the IT sector have decreased in recent years, while tenants from professional services sector have increased over the last three years.

On a citywide-level, we see that IT and finance are the biggest drivers of demand, followed by professional services.

So, where do global firms come in? Looking at companies listed on the FTSE 500, we see that much of the presence from foreign firms in Beijing is driven by manufacturing, not the IT sector.

Finance and professional services sectors are already showing strong interest in the area, and as demand manifests in the market based on space and price, we may even see more of other sectors. At a minimum, the CBD Core Area will offer greater spatial availability and the chance to leverage networks for the face-to-face meetings required to grow a business.

Figure 5: CBD Tenant Mix (2015-2017) Figure 7: FTSE 500 Companies in Beijing

Figure 8: CBD Core Area Enquiries

Figure 6: Beijing Enquiries

Source: JLL Research

Source: JLL Research

Source: JLL Research

Source: JLL Research, MARKETS??

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High-quality building features such as high ceilings and improved lift and toilet provisions will help “future-proof” this new generation of buildings. New buildings will increasingly go beyond LEED requirements and aim for WELL targets, as the emphasis goes beyond energy efficiency to include health and wellness considerations. In the race to secure talent in an ever-competitive market, the health and comfort of employees at work are rising in significance, and a better office space is being increasingly used as another tool to attract and retain employees. We will start to see the functionality of a building take on much greater importance than the form of the building, particularly as concerns about indoor air quality weigh heavily on the minds of workers. But it’s not just about what we can see, it’s also about the operations, procedures, maintenance, and building management systems, which enable the long-term preservation of high standards.

Based on our most recent survey of more than 200 office buildings in Beijing, new buildings in the CBD Core Area are expected to exceed the quality of today’s market-leading buildings and even outshine the average crop of today’s International Grade A buildings. Setting the bar higher is effectively raising benchmark standards for building construction in Beijing.

Leading by example

Figure 9: Beijing Grade A Office Quality Index

Grade A

Int. Grade A

CBD Core Area

Note: Visual reflective of trend from our latest analysis. Source: JLL Research

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Overall Forecast

New Supply Starts New SupplyLandlords Accept Market RealitiesSelf-use Consolidations

Market Accustoms to New SupplyDevelopers Delay Projects

Upgrade DemandPent-up DemandUpgrade DemandLandlord Targets

1 Year 2-3 Years 3-5 Years

New SupplyLandlords Accept Market RealitiesSelf-use Consolidations

15%

CBD Rents(over forecast

horizon)

CBD Forecast

The large amount of supply coming online in the CBD Core Area will prompt a period of rental adjustment. This will continue, as the market requires time to absorb the huge amount of supply. As securing tenancy will be important, landlords of the first new buildings to enter the market are already competing on rents, not only with their peers, but also with established buildings in the market. These effects will be less readily observed in other sub-markets, especially those with different demand profiles. The pre-leasing competition is causing landlords of existing buildings in the CBD to counter with more flexible terms to maintain high occupancy rates. Therefore, as the new CBD Core Area approaches completion, rents at existing CBD buildings are expected to slide further before bottoming out at 15%-plus lower than their current levels within five years. In some cases, these effects have already been reflected in early movers and will set the tone for the years ahead, for which even more cases are expected as new buildings enter the market.

No pain, no gain

Figure 10: Beijing’s CBD Grade A Office Rental Trend

Source: JLL Research

As these new buildings fill up, landlords will enjoy greater pricing power.

But once the pre-leasing period is over and these new CBD Core Area buildings are occupied, achievable rents should rise. As these new buildings fill up, landlords will enjoy greater pricing power.

At the same time, this will allow the older buildings nearby a chance to recover rents. The enabler of this will be continued economic growth and tenant expansion, which we discuss later in this paper.

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London Rental Index

1980

2017

Beijing Rental Index2000

2017

As the impending supply from the CBD Core Area supports the shift to greater parity between landlords and tenants, if not a more tenant-favourable market, we expect it to support the overall development and longevity of the market through the following:

1. Lower rents will allow more corporate growth to stay in Beijing, rather than move to other cities, and cheaper rents could encourage tenants to rent more space to be in the Beijing CBD rather than elsewhere.

Longevity of the market

Figure 11: Office Rent Cycles - London vs Beijing

2. Beijing rents are high by Asian standards. As such, continued rental growth would serve to price out more tenants from the market and limit demand.

By sheer force of volume, the impact of the CBD Core Area will force market rents to normalise. Beijing landlords should be prepared for the inevitability of a cycle running its course, and this is normal when looking at global cities like London, which have been through four cycles in the last 35 years. The resilience of a truly international city will mean a long-term upward trend in rents.

Source: JLL Research

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The large incoming supply will inevitably have an effect on CBD rents over the next five years. Landlords will make greater allowances for well-established and highly reputable companies. Supply pressure will result in more flexible rental terms. The leap forward in building quality combined with lower rents will trigger upgrade demand from tenants all over the city, as a large amount of quality space appears and allows for upgrade as well as consolidation opportunities.

1. Upgrade demand is coming from Grade A tenants who want better space in the CBD Core Area.

2. Existing and future CBD landlords are competing and causing rents to fall, generating upgrade demand from Grade B tenants or tenants at lower-end buildings, including co-working tenants who will now be able to afford Grade A space.

3. Tenants that are spread out across the city may also have a chance to consolidate their office space into one large location in the CBD.

4. Vacated space in older buildings will quickly be taken up by tenants looking at in-house expansion opportunities, alleviating concerns of demand focusing exclusively on the newest buildings.

Upgrade demand from Grade B tenants from around Chaoyang District seeking a more central location will have the opportunity to get one, and these newcomers will form an expanded demand base for the Grade A market.

Sparking upgrade momentum

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Supply Growth Service Sector GDP Growth

Non-CBD Submarkets CBD

>90% of CBD Growth from Core CBD Area

0.1 sqm of Grade A office space per working-age resident

Beijing Shanghai Hong Kong New YorkLondon

Economic growth in Beijing will outpace new office supply growth. Although the CBD Core Area will add a total of 1.8 million sqm – 1.2 million sqm of which is expected to come online in the next five years – the growth trajectory of the economy has the ability to absorb this space. Tertiary sector GDP will grow 41% over the next five years compared to 27% growth in Grade A leasable stock over the same period. In addition, Beijing leads China in the service sector’s share of the economy, underscoring strength in demand for office space in the city4. This recent crop of new buildings will underline Beijing’s role as a magnet for top talent from across the country – talent looking for the

Strength in numbers

Figure 12: Supply Growth vs GDP Tertiary Growth (2017-2021)

Source: JLL Research

Figure 13: Global Comparison of Office Space per Working-age Resident

4. For more on this, refer back to JLL's "No Turning Back – Beijing’s Office Market Set to Shine" for our discussion on Beijing’s pillars of office demand.

Source: Local statistics bureaus, JLL Research

Note: London stock is inclusive of Grade B. New York stock is Grade A for Manhattan.

best quality and most productive office environments. Better buildings ultimately serve companies as another tool in helping to attract and retain top talent.

In addition, while economic growth is projected to outpace supply and help with absorption, we can expect a lag as economic growth translates into real demand. The good news is that space per service sector worker is low in Beijing by global standards. There will be the need for much more capacity than what currently exists.

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Road and metro infrastructure will face rising pressure and increasing congestion as new buildings enter the market. Based on projected occupancy rates, the working population in the CBD will rise by 50% by 2025. Over the coming years, an additional 200,000 daily office workers will descend upon the area, which is already at capacity with around 400,000 office workers arriving to the CBD every day. In addition to these office workers, support staff, government workers, and food service employees will add to the working population in the area.

The traffic situation in the CBD differs from the outlying, less concentrated areas, such as Wangjing and the Olympic Area, which benefit from multiple access points. Located

Bumps in the road

Source: JLL Research

Figure 14 : CBD Population Map of Office Workers

TONGHUI NORTH ROAD

JIANGUOMENWAI AVENUE JIANGUO ROAD

CHAOYANG ROAD

2016 35,000 Workers20,000 Workers10,000 Workers5,000 Workers

Total Office Population394,284

EA

ST 3

RD R

ING

ROAD

EA

ST 4

TH R

ING

ROAD

DON

GDAQ

IAO

RO

AD

LINE

10

LINE 6

LINE

14

LINE 1

DONGDAQIAO STATION

HUJIALOU STATION

JINTAIXIZHAO STATION

DAWANG ROAD STATION

GUOMAO STATION

CBDCOREAREAYONGANLI

STATION

EAST

3RD

RIN

G RO

AD

LINE 18

LINE 1

LINE 6

LINE

17

LINE

10

LINE

14

CBD

LINE

JIANGUOMENWAI AVENUE JIANGUO ROADDO

NGD

AQIA

O R

OAD

TONGHUI NORTH ROAD

EAST

4TH

RIN

G RO

AD

CHAOYANG ROAD

DONGDAQIAOSTATION

VANTONE CENTERSTATION

HUJIALOUSTATION

JIANGUOMEN BRIDGESTATION

JINTAIXIZHAOSTATION

YONGANLISTATION

GUOMAOSTATION

BTVSTATION

DAWANG ROADSTATION

HONGMIAOSTATION

GUANGHUA ROADSTATION

CBD CORE AREASTATION

2025 35,000 Workers20,000 Workers10,000 Workers5,000 Workers

Total Office Population606,869

between the main airport and the CBD, Wangjing and the Olympic Area are well-suited to non-client-facing tenants who do not require regular access to the crowded CBD.

Plans to build a dedicated metro line for the CBD, as well as a future new line proposed to run directly parallel to Line 1, may help to alleviate some pressure. Underground connectivity plans for vehicles and pedestrians are expected to be a major boon for the area once materialised, but still represent significant engineering and coordination challenges as well as lengthy construction lead times. Indeed, the ability to facilitate a smooth flow of traffic in the CBD, one of the most congested areas of the city, will have a significant impact on the overall success of the CBD Core Area.

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The new buildings will forever change the character of the CBD as they complete the next phase of Beijing’s journey to achieving a CBD of world-class distinction. The CBD Core Area will alleviate a shortage of high-quality buildings purpose-built for the elite echelons of Beijing’s rising services sector. The area will also be home to a new super-tall building for Beijing that will serve as another milestone landmark for the CBD. There is a real opportunity for Beijing to leverage its position as a global centre where top talent and decision-makers gather, thanks to the effective scale and integration of all parts of the CBD.

Forging ahead

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Authors:

Steven McCord Head of Research, North China steven.mccord@ap.jll.com

Linda Yu Senior Manager, Research, Beijing lindat.yu@ap.jll.com

Yang Mi Manager, Research, Beijing yang.mi@ap.jll.com

Ian Flanagan Senior Analyst, Research, Beijing ian.flanagan@ap.jll.com

Eric Hirsch Head of Markets, Beijing eric.hirsch@ap.jll.com

Joe Zhou Head of Research, China joe.zhou@ap.jll.com

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