As people bid farewell to the Lunar New Year holiday and gradually return to work, who are the largest tenant group of office buildings in Shanghai? Research finds that the TMT sector has overtaken the financial industry to become the No.1 tenant.

Several real estate consulting firms have discovered that Shanghai’s office building market recovered strongly in 2021, with a total net floorspace of 1.298 million square meters leased out, setting a new high. While the financial industry is growing steadily, its long position as the No.1 tenant of office buildings in Shanghai has now been replaced by the fats-rising TMT sector.

Why has such a change happened?

A New Growth Driver

According to CBRE Research, the TMT sector accounted for 26% of the incremental demand for office buildings in Shanghai in 2021, overtaking the financial industry as the largest tenant.

TMT is not a new word. With digital economy as its core, the TMT sector is literally growing fast with each passing day. In the A-share markets of the Shanghai and Shenzhen stock exchanges, there is an index called "CSI TMT" that specially tracks movements in the TMT sector. Its constituent stocks include top-notched tech companies such as ZTE, iFLYTEK, Hikvision and Focus Media. Through iterative innovation, they provide consumers with a wide range of electronic products, giving rise to a booming emerging industry.

This has also been one key area of industrial development in Shanghai in recent years.

Some experts believe that when a city reaches a certain size, its economic growth will slow down, and future growth poles will depend more on innovation. In 2021, Shanghai unveiled a plan to build a "3+6" new industrial system, which includes the 3 leading industries of IC, biomedicine and AI, as well as the 6 key industries of electronic information, life and health, automobile, high-end equipment, advanced materials, and fashionable consumer goods. In addition to consolidating Shanghai’s existing advantageous industries, the plan places greater stress on cultivating new drivers of urban development.

"The new industrial system covers all core segments of the TMT sector. The change of the No.1 tenant of office buildings has essentially benefited from the implementation and penetration of Shanghai’s 3+6' new industrial system," said Lu Yan, Head of Research at CBRE East China.

Through the commercial building landscape in Shanghai, one can intuitively feel the power of the new growth driver.

In 2021, TRANSSION, a leading provider of intelligent terminals and mobile Internet services expanded its rented space by 10,000 square meters in Zhangjiang Baijiatong Park. In Caohejing Park, many game enterprises completed relocations, expanded their rented space or built new headquarters in just one year. ByteDance spent RMB 2 billion to acquire the land block along the Yangpu River to build its office building next to Meituan and BiliBili, both of which only recently completed their own land acquisitions. Xiaohongshu, an Internet social platform with a DAU of 200 million, has moved its headquarters to SOHO Fosun, which creates a unique landmark in the New World of Shanghai area.……

In recent years, emerging industries have been developing at a pace well beyond what many professional research institutions have expected. This can be proven by a set of impressive figures: in 2020, incremental demand for new office buildings in Shanghai's financial industry was about 4% higher than that in the TMT sector. However, in just one year, the two changed positions, with the TMT sector leading the financial industry by almost 7%.

Besides strong growth, new trends have also risen in emerging industries, with TMT customers favoring downtown areas with high rents. In the past, office buildings in the core business districts were mostly rented by leading IT companies such as IBM and HP. Today, most of their tenants are AI, big data and cloud processing companies from the broad IT sector.

The industry is also becoming more segmented. To adapt to this trend, some leading real estate consulting firms have specially adjusted their statistical frameworks and divided the TMT sector into online entertainment, fintech, enterprise software, Internet services, etc. "To give a simple example, the apps of Taobao, JD.COM and Pinduoduo used to be the most mentioned shopping apps. Now, more niche entrants like Dewu and FARFETCH have emerged.” One industry source acknowledged that segmentation is necessary, because new business tracks of a RMB 1 trillion size are likely to come from these growing segments.

A Fast-growing Business Track

In 2021, the financial industry made up for 19% of the incremental demand for office space in Shanghai. Although it has now retreated to the second place, insiders point out that the new demand is only a relative value. In absolute terms, the financial industry still shows a strong trend of increasing rented space.

"Foreign banks, city commercial banks, securities brokers, and insurance, private placement and asset management companies still take Lujiazui as their preferred destination, and 70% of the new demand in the financial industry is in Pudong. Investment banks and fund companies are clustered in the office buildings of the West Nanjing Road Business District, and the overall pattern has not changed much," said Lu Yan.

"Clustering" has accelerated the formation of financial agglomeration belts. Last year, Zhongtai Securities purchased two office buildings of the Greenland Bund Center in Huangpu for RMB2.7 billion, which will be used as the centralized office venues for its units stationed in Shanghai. So far, the building cluster of the Greenland Bund Center has gathered various leading financial institutions such as PICC, Guohai Securities and CCB Life. Currently, there is also a 240m building open to small and medium-sized enterprises. “Although many enterprises have expressed an interest in us, we prefer to attract financial service companies so as to upgrade the industrial structure of the Bund financial agglomeration belt,” said Greenland Group.

The industry widely believes that another round of office space expansion is to come in the financial industry. The strong demand for office buildings in the financial industry is a window to observe how well the economy fares. Through the office building market, the "barometer" of economic operation, it is not difficult to see the strong momentum of Shanghai's economic growth. In 2021, Shanghai's GDP grew by 8.1%, which is widely recognized as a high rate of growth, 2% above the target set at the beginning of the year. This is a remarkable achievement by Shanghai in a tight economic climate.

Jones Lang LaSalle believes that as one of the important measures for economic recovery, the opening up of the financial industry has not only boosted financial reform, but also effectively hedged against the negative impact of the Covid-19 pandemic on China's economy.

As the financial industry enters the "fast lane" of opening-up, more and more international financial companies have come to Shanghai. In Lujiazui, 10 international asset management companies established their homes there last year, including three of China’s first group of wholly foreign-owned public fund management companies: BlackRock Fund, Fidelity and Neuberger Berman. Statistics show that in the Lujiazui area alone, asset management institutions from 13 countries and regions have set up 110 foreign-funded asset management companies of various kinds, accounting for more than 90% of the total of their kind in China.

A New Space

In the new year, what industrial development trends can be revealed through the supply and demand landscape in Shanghai’s office building market?

Many real estate consulting firms expect a return to the peak supply of 2017, with at least 1.4 million square meters of new supply to be added in 2022. There are still ample office buildings to enter the market this year. In a way, this reflects the confidence which developers and investors have in the long-term upward trend of Shanghai's economic fundamentals. This can be sees from the locations of the new supplies. In addition to the CBD in downtown Shanghai, Zhangjiang, Caohejing and Jinqiao all have premier projects for market launch in the near future. These are the areas with the highest industrial agglomeration in Shanghai and the strongest office space demand in the future.

Experts predict that the TMT sector still has a strong growth momentum this year. The biomedical industry with industrialization as the main development line and the electronic information industry with IC as the core leading field will step up efforts to make breakthroughs in core technologies and expand production capacities fast in the future.

The fast-growing headquarters economy will further stimulate the demand for office buildings. According to Savills, Shanghai has so far attracted more than 800 regional headquarters of multinational companies. In the meantime, Chinese enterprises, including China Electrical Equipment Group which was recently established in Shanghai and China State Shipbuilding Corporation which has moved to Shanghai, also have a growing demand for office buildings as their headquarters.

Some experts have pointed out that the service industry, as Shanghai’s pillar industry, has also undergone structural changes. Especially, accounting firms, rating agencies and other specialized service companies are now growing fast, which has in turn fueled the expansion of both business segments and office space demand. This has mainly benefited from a series of reform policies to serve the real economy through capital market means and broaden financing channels for market players, such as the establishment of the STAR Market and the Beijing Stock Exchange.

Lu Yan said that the current stock of high-quality office space in Shanghai stands 16 million square meters, ranking first in China. Globally, however, Shanghai still has a certain gap to bridge with its global counterparts like New York, London and Tokyo. For example, Shanghai’s current office space is only one-third of Tokyo’s. From this perspective, Shanghai still has tremendous growth potential for economic volume and industrial development.

 

Author: Qi Yingpu, Shanghai Observer