During a recent shopping trip to a large mall near my home, construction activity on the upper floors attracted my attention. All of the retail shops on the upper floors, which I never visited due to lack of interesting tenants, were closed and the space was being converted to office space for strata-title sale. Meanwhile, the Carrefour in the basement and restaurants on the ground floor continue to operate and satisfy the main goal of most visitors to the mall – to eat and to buy groceries.
This was not the only case. Several Beijing shopping malls underwent similar conversions in the first half of the year. One centre in Wangjing closed down its anchor department store and converted the space into offices for strata-title sale. Two other examples near the train station closed several floors for conversion to office use which will be put on the leasing market. The phenomenon has raised concerns from many industry players.
Why are these properties converting to office? First, all of the projects are located in key office submarkets (for example, Zhongguancun, Third Embassy, Wangjing, and East Second Ring Road), and demand for office space in these locations is strong while vacancy remains limited. Also, office rents are very high in Beijing. On the other hand, they are not key retail clusters and upper floors of retail space, if converted to office, may achieve rents 10%-20% higher. Although ground floor retail rents are high in Beijing, the same is not true for less accessible and less visible parts of a shopping mall. But for office space, visibility does not matter and achievable rents are high.
In addition, home purchase restrictions in the residential property market have led to increased demand for strata-titled commercial properties, and sales prices for office space are very high. It is much easier to sell strata-titled office space compared to retail space because vacancy risk is much lower. Furthermore, some landlords may wish to strata sell some space in order to raise capital.
How will these conversions impact the office and retail markets? For the office market, once the construction is complete, the quality of new office space can only meet the requirements of small companies, a tenant group which does not overlap with Grade A offices. The space which was removed from the retail market was not occupied by big name retailers, and they were not busy stores, therefore they will hardly influence the market. However, it is possible that local neighbourhood centres in this area might enjoy less competition than they once did.
About the author
Tin Sun is Senior Manager in JLL’s research team in China, based in Beijing.