Shanghai is set to be Asia Pacific’s largest office market within the next three years, surpassing Hong Kong, Tokyo and Sydney as the Chinese commercial hub’s service sector drives demand for grade A space.
Approximately 1.1 million square metres (11.8 million square feet) of Grade A office space will be added to the city’s central business district by 2020, according to a new report by global property consultancy JLL, while new business districts on the city’s periphery will add an additional 3.3 million square metres (35.5 million square feet). The new deliveries will bring Shanghai’s total to 11 million square metres (118.4 million square feet) by 2020, surpassing Hong Kong, Tokyo and Sydney.
A growing appetite for high-quality office space from both domestic and multinational corporations is expected to adequately absorb this enormous pipeline, according to the latest edition of Office 2020, an update on office markets globally from the Fortune 500 property services firm. Demand for Grade A office space in Shanghai is mainly driven by the finance, professional services, retail, health care and pharmaceutical sectors, with financial firms accounting for 45 percent of net Grade A office take-up in 2016 the company’s research found.
Tech Tenants and Domestic Firms Hungry for Space
Tech firms play a diminutive role in Shanghai’s office market, contributing only 10 percent of Grade A take-up – in contrast to technology hub Shenzhen, where that figure is 44 percent, and Beijing where digitally driven firms occupy 36 percent of international grade space, points out Daniel Yao, Shanghai head of research for JLL. That ratio is likely to change in the future, says Yao, as a growing number of tech firms in Shanghai are looking to shed Grade B or business park space for Grade A premises, or add a high-quality downtown address for their front-office operations.
“Definitely we see the trend is tech firms becoming a more and more important demand source in Shanghai,” besides the other key industry drivers, Yao comments. “We think it’s an emerging, rising demand source here in Shanghai and will continue to support the net take-up going forward.”
Office take-up in Shanghai is also increasingly being fueled by domestic firms, which accounted for some 30 percent of office demand before 2012 (versus 70 percent for multinationals) but now contribute about 60 percent of demand – a dramatic shift in just five years. Shanghai’s growing clout as a gateway city is drawing in companies from across the Pearl River Delta region and elsewhere in China to set up headquarters in the mainland financial hub, as those firms move up the value chain, make overseas acquisitions and seek to burnish their corporate image.
Rising Downtown Rents Spawn New Business Hubs
The growth of new business districts outside Shanghai’s traditional downtown is also changing the geography of the market. Pressured by climbing rents in the high demand Puxi and Pudong core markets, many companies are turning to fringe areas for more affordable space that still offers good public transportation access to the downtown. The Qiantan (or New Bund) area south of the former World Expo site is a prime example, with major mixed-use projects in the works from international developers Tishman Speyer, Swire Properties, and Hongkong Land.
Other emerging districts include the Xuhui Bund (or West Bund) area across the river from Qiantan, as well as the Railway Station and North Bund areas to the north of Puxi CBD. Yanggao Road in Pudong is positioned as a new cluster for financial firms to the east of Shanghai’s traditional financial center of Lujiazui.
Some of these emerging districts are growing even faster than expected. In the case of the Shanghai Railway Station, North Bund, and Yanggao Road locations, “CBD tenants are already putting projects in these three areas on the CBD shortlist. Previously they may not really seriously consider those areas,” says Yao. The traditional downtown centres are, in fact, growing outward to encompass these decentralized submarkets.
Connectivity to the sprawling Shanghai metro system — which surpassed Tokyo’s to become the largest in the world in 2010, the availability of new, high-quality office stock, and an evolving tenant profile that now includes law firms and media companies, have all served to make these emerging districts of Shanghai more viable as alternative options for tenants who formerly stuck to the city’s core locations.