A decade out front: have Shanghai's luxury-branded "Mei-Tai-Heng" complexes finally gone stale? | 2016 Big-Company Digitization ⑩

Standard offices in high-rise towers, and malls so dense with luxury brands they can feel intimidating — how much do these still appeal to young workers and the companies that employ them? Commercial real estate has run into a different kind of trouble.

Traditional big companies are still working to get closer to young consumers, hoping the internet can transform their supply chains and reshape how they compete. QDaily is running a year-end 2016 series on digitization — ten articles on what big companies gained and lost along the way. This is the final installment.

Same as every year. On December 1st, a towering Christmas tree went up outside Plaza 66 on Nanjing West Road in Shanghai, and the mall's circular atrium filled with an elaborate holiday display. Many passersby stopped to take it in, and most couldn't resist snapping a few photos.

But the white construction barriers wrapping the building, and the debris not yet cleared from the work, yanked you straight back to reality.

Wang Yijun had worked at KPMG for three years, commuting from Nanjing West Road subway station to his office on the 50th floor of Plaza 66's Phase II tower. Now he had to walk seven or eight minutes in the open air against the cold. The white barriers had swallowed the ground floor, and the shortened space felt dim. Add the grit that blew over from the site on windy days and the long waits during elevator retrofits, and this expensive tower sometimes didn't feel like such a good deal.

Plaza 66's large-scale renovation had been underway since early 2016, almost a full year. The official line was that it would run into early next year. But Wang Yijun felt that ever since he started there, some small-scale construction or other had basically never stopped. "It always feels like something's being fixed," he said.

As if by arrangement, the neighboring Melong Town Plaza had recently been so wrapped in scaffolding and dust netting for its facade work that without a guard at the door to point the way, you might not find the main entrance — the wrapping had only just come down. And CITIC Square, sandwiched between Plaza 66 and Melong Town Plaza, was mid-renovation too: the best-positioned shops on the third and fourth floors had been vacated.

These were once spaces where a vacancy was nearly impossible to come by. Plaza 66 and CITIC Square both opened in 2001, and together with Melong Town Plaza — which opened in 1998 — they formed the landmark "Mei-Tai-Heng" commercial district. In Shanghai it has long been considered the most mature example of the "retail-plus-office" model, otherwise known as a CBD commercial cluster.

Look at the market data alone and you might conclude they're doing fine. According to figures from real estate consultancy Cushman & Wakefield, ground-floor shop rents in the Nanjing West Road district hit 2,446 yuan per square meter per month in the second quarter of 2016 — still the highest of any district in Shanghai. Back in 2014, Plaza 66 alone reached 3,600 yuan (120 yuan per square meter per day).

Even in the first half of 2016 — with shops shuttering and renovations underway — Plaza 66's retail sales per unit of floor space still grew 18%. The office portion held a near-full 96% occupancy rate, and rents edged up 3% year-on-year.

But fifteen years on, everyone agrees the buzz has faded. The magnetic pull that once drew crowds to "Mei-Tai-Heng" is weakening. In small details, you can sense how these complexes feel about the new order of things.

After the local paper Liberation Daily ran a piece titled "Nearly 20 Shops Closed — What's Happening at CITIC Square?", CITIC Square hurried to respond that the vacancies were perfectly normal "commercial reserves." Then in October, after Korean conglomerate Lotte Group signed an agreement with CITIC Group to run CITIC Square through a joint venture, the mall issued an official notice that turned a story the media had largely confirmed — that a Lotte department store and duty-free shop were about to move in — back into an uncertain rumor.

That had originally looked like one of the upscale mall's attempts to rejuvenate itself and step away from a pure-luxury identity. But the wish to preserve a high-end image built up over years, along with the fear of losing brand tenants — or even office tenants — made the operators extremely cautious. Yet pressure from a growing field of competitors, plus a generation of young consumers whose tastes are hard to pin down, is making change feel unavoidable. Otherwise, why launch such a high-profile renovation at all?

I

After the three "retail-plus-office" complexes — Melong Town Plaza, CITIC Square, and Plaza 66 — appeared on Nanjing West Road, the strip quickly became one of the most dynamic stretches of the city.

In 1992, Lin Chongsheng, a director representing Hong Kong developer Hang Lung, came to scout Shanghai and set his sights on a Nanjing West Road site that was still a petrol station at the time. "From a purely geographic standpoint, you couldn't find a better plot in Shanghai. The two most iconic properties of that era — the Shanghai Exhibition Centre and the Portman — were right next door, and it sat on a major intersection. I was convinced this was the most likely place in all of Shanghai to create a flagship project, the best and most central plot in the city."

Hang Lung acquired the site in three phases and settled on a strategy: luxury retail for the mall, top-tier international tenants for the offices. The project cost over 6 billion yuan. According to He Panguang, who served as Managing Director of Plaza 66 Shanghai, the mall spent more than three years negotiating with Gucci alone, learning the granular demands of luxury brands — everything from management contracts and tax policy to customs clearance and shop fit-outs.

This made Plaza 66 the flagship China location for many luxury brands. Li Rong, who works at a luxury company, told QDaily that even now this is still one of the first stores in China to receive that brand's new products, and one of the most fully stocked.

After Plaza 66 opened in mid-2001, the effort paid off fast. Together with Grand Gateway 66, which had opened earlier in Xujiahui, the two projects' combined 2001 revenue already accounted for 11% of Hang Lung's total annual income from its mainly Hong Kong portfolio. By 2004, rental income from the Shanghai market represented 23% of the group's total rental profit.

Perhaps inspired by Hang Lung's early success, the defining feature of Nanjing West Road today is the sheer density of luxury and premium brands. One example: walk from Kerry Centre near Jingan Temple all the way to CITIC Square near Wujiang Road, and on the mall facades along the way you can collect almost every major luxury name — Burberry, Armani, Dior, Gucci, LV, Cartier, Prada, Montblanc — in a single stretch.

In running the renovation, of course, no one wanted to disturb the luxury tenants already paying high rents. Take Prada at Plaza 66: to keep the impact on sales to a minimum, it was given a temporary space during the work; when it returned to its original spot, three full floors had been opened up into one, and the store now had its own small private elevator.

These interiors — which can almost make you forget you're inside a mall — can be read as advertising space the mall gifts to its anchor tenants. More money comes from office rents, paid by those same luxury companies leasing floors in a premium tower like Plaza 66. This is the classic CBD cluster model: shops and offices, under one roof.

II

Part of "Mei-Tai-Heng"'s appeal back then was its transport links and amenities. From either the mall or the offices you could walk to Line 2's Nanjing West Road station, or the Jingan Temple hub, in under ten minutes. When new lines — 7, 12, 13 — opened later, the locational advantage only grew. For added convenience, Hang Lung even ran a few shuttle-bus routes for office workers, free connections to subway stations during the morning and evening rush.

Then there was food. Beyond the already-revamped Wujiang Road and the restaurants inside the malls, Plaza 66 office workers were in the habit of slipping out to the cheap, varied side streets nearby for a twenty- or thirty-yuan lunch. If you knew the area well, you could eat there for a month without repeating yourself.

Peng Liang, who once worked at Nike, said he and his colleagues had a particular fondness for the small park on Xikang Road near Plaza 66: "We'd often walk over after lunch. This used to be the foreign concession, so the buildings have real character — the atmosphere is nothing like the malls and office towers."

In short, compared with Huaihai Road — the other prime district in the city center — the Nanjing West Road cluster that "Mei-Tai-Heng" built was a relatively better choice both for premium brands trying to break into China and for newer companies eager to shape their image by locating next to industry names. This also explains why, even though both were developed mainly by Hong Kong investors, projects on the eastern stretch of Middle Huaihai Road — "Lippo Plaza," "Jing'an Plaza" — feel completely different from complexes like Plaza 66, Kerry Centre, and Réel.

"Our Hong Kong counterparts are used to copying their Hong Kong model here — the same small properties, the same quality — while the heavyweights either don't build large-scale, highest-quality projects, or don't know how. So if we believe Shanghai will become a world-class city, we have to build world-class properties in quality and scale." That is how Hang Lung Group Chairman Ronnie Chan put it in his 2001 letter to shareholders.

But as the broader district was built out, the advantages "Mei-Tai-Heng" once held have been eroded step by step by competitors with stronger or more flexible offerings:

Hang Lung's old logic of choosing sites for their landmark setting has given way to so-called "transit-oriented development" — building directly above subway stations. In overly specialized standard office towers, eating, resting, and socializing all become problems. And forget flexible new ideas like co-working spaces — even reworking two adjacent floors of an office here is no easy thing.

III

These days Wang Yijun sometimes envies people who work in Kerry Centre or Park Place, because their commute runs straight from Jingan Temple subway station into the building — no rain or wind at all.

If he misses Hang Lung's shuttle in the morning, or it gets snarled in Nanjing West Road traffic, those seven or eight minutes of open-air walking feel like a real annoyance. And back in 2008, when Peng Liang joined Nike, the clusters of unlicensed motorcycle taxis near the subway exit were another common way people got themselves to Plaza 66 for work.

As Hong Kong developers like Swire and Shui On gradually entered the mainland market, they brought the transit-oriented development concept with them: complexes with more basement levels connecting directly to subway stations, and buildings that sit a bit farther from a station linked by long underground passages or even elevated walkways.

Speaking with QDaily, Shaun Brodie, Head of Research for Greater China at Cushman & Wakefield, repeatedly pointed to several newer projects at either end of the Nanjing West Road district that use this model — HKRI Taikoo Hui, Crystal Galleria, and Jing'an Kerry Centre.

"Built directly above subway stations, these projects have a locational advantage noticeably stronger than something like Plaza 66. And a mall like Kerry Centre has kept developing its underground floors — so people aren't just moving across the mall's flat levels; they're also flowing through more flexible vertical space. We see this as a very promising commercial model for the future."

Plaza 66 once had an underground floor too — the B1 level, now sealed off, which used to focus on watch boutiques. After the renovation, those shops will gradually return, alongside two new food-and-beverage concepts.

Dining and shopping are intertwined problems. When a mall is filled with premium and luxury brands, those brands don't just choose their neighbors carefully — they also put pressure on the food offering. And the tier, price point, and cuisine a mall picks for its restaurants in turn shape the spending appetite of its biggest source of footfall: the white-collar workers from the offices above.

The lunchtime exodus of those workers already tells part of the story. By comparison, if you work in the Jingan Temple area a few hundred meters away — where Réel connects underground to Park Place and has its own basement food street, and Kerry Centre has two basement levels of dining — you're far better served than at Plaza 66. Even iAPM on Huaihai Road, pitched at a similarly premium tier, has plenty of mid-range dining in its basement.

Even Peng Zhaohui, the deputy general manager who has overseen operations, leasing, and promotions at Plaza 66 for fourteen years, has said that the most popular spot in the whole mall is actually a cake-and-coffee shop called Cova Café. By the standards of the mall's other retail brands, the prices there aren't high and the drinks are nothing special — but next to the Plaza 66 office tower, which lacks meeting-friendly social space and has a lobby Starbucks with only a dozen or so seats, it's an obviously more relaxed place for a casual catch-up.

This also explains why restaurants in Plaza 66 charging around 100 yuan a head actually do better business. One weekday lunchtime we watched the restaurants on the mall's fifth floor and found two or three such places essentially full, while a slightly pricier option like Chao Tang dropped to around 70% occupancy.

IV

The tenants who chose Plaza 66's offices back in the day now set higher expectations for what going to work should feel like.

In a survey of millennials worldwide, real estate consultancy CBRE found that young Chinese professionals showed higher career loyalty than expected — but that good office design and layout had become a satisfaction measure 81% of mainland respondents said they cared about deeply.

From that angle, you can see why a company like Nike would finally move its Greater China headquarters out of the inflexible lower floors of Plaza 66. During Peng Liang's six years there, everyone originally had an assigned desk and shared a fairly large open break area. But as more colleagues joined, the break area got converted into office space too.

Although Hang Lung had built in a number of relatively forward-thinking features at the start — including raised flooring whose height could be adjusted and which made cable management easier — fifteen years later those features had become industry standard. And many companies that didn't want to depend on elevators, hoping to knock through the ceiling and join two stacked floors of their office into one open space, found this efficiency-boosting move simply wasn't easy to pull off here.

In 2014, Nike completed its headquarters move. The new campus was purpose-built for the company by Tishman Speyer — which also has a presence in Plaza 66. It sits a few kilometers farther out from the urban subcenter of Wujiaochang, but the tradeoff was worth it: the space is big enough, and the way it's used fits the brand entirely. Besides three office buildings, the campus includes a football pitch, an indoor basketball court, a fitness center, and a standalone dining hall and conference facilities.

Zhou Zhifeng, Head of Research for East China at JLL, has described how Hang Lung learned a full year ahead that Nike would not renew, and immediately began hunting for a replacement. Today, those six or seven floors have been taken by a brand along the lines of LVMH.

JLL's research has documented many big-company cases of this same "core-district tenant moving outward" pattern. Drug companies such as Roche and MSD, once in the core CBD, have moved to Caohejing and Minhang respectively; Carrefour relocated to Putuo; and an advertising holding company like WPP — which once made a point of staying close to its clients — has moved from central Jingan to "New Jingan," near the railway station.

For industries like manufacturing, trade, design, and fast-moving consumer goods — businesses that no longer need a prime storefront to bring in clients — moving out of the city center cuts costs sharply while affording far greater flexibility.

And for startups and small companies that value a good address but can't afford the premium rents, Nanjing West Road now also offers co-working options like SOHO 3Q and "New Space" at SOHO Donghai. SOHO China's biggest gains this year may have come from the two Shanghai office buildings it sold, but the 3Q model — whose rental performance it hasn't yet disclosed — remains what Pan Shiyi calls the company's strategic priority.

V

More than a decade ago, those top international brands were in the thick of a full-throttle push into China. Add in considerations of image and operations, and Hang Lung's combination — "luxury-brand cluster + upscale dining + top-tier office tenants" — looked like a perfect fit.

At the time, comparable CBD-cluster models were still rare, which left "Mei-Tai-Heng" with little competition. Meanwhile luxury consumption in China was rising sharply, but there were few ways to buy. In a sense, these malls may have also served as luxury showrooms and market educators.

Hang Lung bet on exactly the right momentum: Thomson Reuters research shows that in 2000 Chinese consumers accounted for just 2% of global luxury spending; today the figure is close to a third.

After the two Shanghai projects' huge success, Hang Lung began looking to expand the model from 2002 on, surveying nearly 30 major cities across the country for suitable land or properties. In his annual letters to shareholders, Ronnie Chan laid out his read on mainland opportunities in compelling detail. He remained convinced that demographic dividends were still driving growth in many provincial capitals, and that a developer like Hang Lung — skilled at starting from a bare plot and building large premium malls from the ground up — would find strong opportunities in cities with real purchasing power.

Setting aside the Kunming and Wuhan projects still under construction, Hang Lung has now opened "Plaza 66"-style developments in five cities — Shenyang, Jinan, Wuxi, Tianjin, and Dalian. But in 2015, those projects' combined rental income came to HK$1.329 billion — still short of Shanghai Plaza 66's figure on its own.

Wuxi, a Yangtze River Delta city, may be among the stronger performers of the bunch. It is not short of affluent consumers: in the first half of 2015 alone, 93 Ferraris and Maseratis were sold there. One can easily picture these as the same buyers who, when Plaza 66 first opened in Shanghai, would drive over specially to shop for luxury goods.

But with luxury consumption battered by anti-corruption policy, daigou purchasing agents, and the growth of overseas shopping, Hang Lung's seemingly stable model has been caught in an awkward feedback loop precisely because it leans so heavily on luxury.

This may be one reason Ronnie Chan misjudged the mainland's e-commerce market.

In his shareholder letter of 2013, he endorsed his research team's findings on mainland e-commerce: the less developed the city, the greater the impact of e-commerce, so the effect in first-tier cities would be smaller than in second-tier ones. In cities like Beijing and Shanghai, where physical retail is abundant, demand for online shopping would be more limited.

The reality turned out to be the opposite. One month earlier, on "Double 11," Alibaba's e-commerce platforms had generated 120.7 billion yuan in transactions in a single day. Among those shoppers was an elite tier of "APASS" members whose average annual spend tops 300,000 yuan. According to data shared by Alibaba Group CMO Dong Benhong, this group of exceptionally heavy online and overseas shoppers alone spent more than 30 billion yuan across Alibaba's platforms in a single year. And platforms like Yangmatou and Xiaohongshu are competing for the luxury consumer too.

This is exactly why upscale shopping centers now stress experiential space. Malls like iAPM and Réel have added more mid-range dining — even cinemas — to draw younger visitors, and beyond luxury goods are bringing in more lifestyle brands. The effect is that even young people who don't have much to spend feel it's worth the visit.

VI

"Put in the effort, think like a tortoise, run a hare's business" — Ronnie Chan's aversion to quick profits was once the operating philosophy behind the Hang Lung model. But what he now faces in the market may no longer be rivals chasing quick gains in the same industry; it may be a generation of consumers with constantly shifting tastes, and the brands desperate to understand what those young people want.

Li Rong's office is on the upper floors of Plaza 66 Phase I. Riding the elevator, she often finds herself wondering things like: "Why does the TV in here play CNBC — all serious English financial news? I'd rather it ran an American drama so I could relax a bit."

Outside work she rarely comes here to shop, or even to browse. Her favorite place in the whole mall is a European-style general store. As for the big-name brands blanketing the building's exterior, in Wang Yijun's words they carry a "do not approach" energy.

Compared with the audit department downstairs, where late nights and constant travel are the norm, Wang Yijun is relatively content with his current role. In a 2015 Didi marketing campaign that ranked Shanghai office buildings by how many of their workers ordered late-night rides, Plaza 66 topped the list. By 2016, the daily number of Didi rides starting from the building had grown 1.3 times over the year before.

In fiscal 2015, KPMG took in US$24.44 billion in global revenue, last among the Big Four accounting firms. Word circulating internally is that the firm may cap annual promotions this year, having lost a number of important clients — making an already grueling job for young employees feel even less appealing.

This may be the most important problem Plaza 66 faces: its tenants fail to attract young talent. Alice, who joined Plaza 66 early this year after leaving an agency, found that despite being fairly senior at her last company, she was now the junior member of the team: "The team structure here is incredibly stable — almost everyone has been here seven or eight years, some even ten or more, all in their thirties. They're quite content with their work, and even if they do switch jobs, it's probably just to another equally stable brand in the industry."

There's nothing wrong with a luxury-brand positioning in itself. But if you let luxury lead you around entirely — if you start running yourself like a luxury brand — you may end up with a badly distorted picture of reality. And the "Mei-Tai-Heng" model is itself a microcosm of the broader changes underway in China's office market.

(At the interviewees' request, Li Rong and Alice are pseudonyms.)

Infographics: Feng Xiuxia

Cover image from the Hang Lung Group official website and Wikipedia