"Shanghai Has No CBD" — and That May Be Exactly Right

Next to Beijing, Shanghai never had much of a CBD character to begin with. Now the pull away from the center is getting stronger.

Over lunch one day, Wang Pianpian told a coworker she had just realized there were already five Starbucks near the office.

On December 16, 2015, GroupM, where Wang works, moved into Dabang Collaboration Plaza. It was one of the big stories in advertising that year: WPP, the world's largest advertising group, "migrated" 26 of its Shanghai companies and more than 3,000 employees out of ten downtown office locations to a site on Hengfeng Road in the north of the city, next to Shanghai Railway Station.

Like transport hubs in many large cities, the area drew crowds, and some locals wrote it off as "foul and chaotic," with the historical stigma of the old Zhabei District's "lower corner," the down-market side of town. But with government planning, developer money and corporate relocations all converging here, that was changing.

The newest of the five Starbucks sits in CapitaLand Xingmao, 500 meters from Dabang Collaboration Plaza. It is a new retail-and-office project built over the Hanzhong Road station interchange hall — where metro Lines 1, 12 and 13 meet, expanded at the end of 2015 — and is held jointly by Shanghai Shentong Metro Group and CapitaLand. The retail floor area is only 17,000 square meters, less than a third of the office space, but restaurants take up 35% of it.

Wang now eats lunch at CapitaLand Xingmao often. Two years ago, when we first interviewed her, she still could not stop talking about the drunken crab at a restaurant near her old office, Century Trade Plaza, and about a street where she could eat something different every day of the week. Now she is thoroughly at home near the train station. She and her colleagues have kept up the downtown habit of exploring whatever is nearby, pushing their range out to a two-kilometer radius: "Take Joy City. The usual move is to grab a cab or a shared bike over there, then walk back after we eat."

Location, the first law of real estate, may be up for question in Shanghai.

The same story is playing out all over the city. 3M leased 20,000 square meters at Wandu Center in the Hongqiao Development Zone; Medtronic leased 15,000 square meters at Qiantan World Trade Center; YKK moved into Sinar Mas's White Magnolia Plaza in North Bund, finished in early 2017 and billed at 320 meters as the tallest tower in Puxi; Kao moved to CapitaLand Xingmao; Philips moved to Shibei Smart Valley; MetLife also left downtown for North Bund.

None of these are in the traditional central business district. Over the past two years, in fact, a growing share of the business in Shanghai's Grade A office market has been done outside the CBD.

A recent report from the property consultancy JLL lays out much of what is changing. Drawing on a survey of 165 office tenants and 31 investment institutions, it says: "In 2009 Shanghai's non-CBD Grade A office stock was only 400,000 square meters; today that figure has jumped to 5 million square meters." That is now on a par with the Grade A stock inside the CBD, and its net absorption has been growing faster than the CBD's year after year.

The report counts 16 non-CBD areas. Three of them — Shanghai Railway Station, Sichuan North Road/North Bund, and Yanggao Road in Pudong — are judged mature enough to become new CBDs in their own right.

"There's a fairly complicated scoring system, split into three dimensions: supply, demand and infrastructure," Yao Yao, JLL's East China research director and one of the report's main authors, told QDaily. Supply mostly means the "quality and quantity of buildings" in an area; as a rule it takes at least "300,000 to 400,000 square meters to count as a Grade A office cluster." Demand means the quality of the tenants and the volume of inquiries, and sometimes how fast those tenants are growing — Wujiaochang, with its many tech companies, is one example. Infrastructure covers new metro lines and nearby shops and restaurants.

Shanghai is the first choice for many multinationals setting up a China headquarters, and its non-CBD districts formed slowly, year by year. The relocations of big companies are what get noticed.

"WPP was the watershed. Once it came to the train station, a lot of good tenants started thinking about moving there too," Yao said.

Nike and Xinjiangwan City is a similar case.

In 2014, Nike's Shanghai headquarters left Plaza 66 in downtown Jing'an and built a nearly 60,000-square-meter Nike Campus in Xinjiangwan City, Yangpu District, 15 kilometers away. That left more than 20,000 square meters empty at Plaza 66 and made it, briefly, the talk of the Grade A office market.

At the time Plaza 66's average rent was around 10 to 12 yuan per square meter per day, and it housed the China headquarters of more than 20 multinationals, including Carlyle, KPMG, Chanel and H&M — arguably one of the benchmark office towers in Shanghai. But "a lot of tenants outside the traditional CBD need large floor plates," Zhou Zhifeng, JLL's China research director, said at the time, pointing to Nike, and to Roche, which left downtown for Shui On's Hongqiao Tiandi and leased 18,000 square meters. "You simply can't find that much space downtown."

Because so many employees are involved, a big company's move works like a small migration.

"Three years ago the subway out here was completely empty. Now I can't even get a seat — I have to stand." Xiao Xiaozuo started at Nike Shanghai in September 2015 and moved to the city that November, renting an apartment at Yunhe Garden behind Jing'an Temple. He prefers living downtown and isn't willing to move his whole life to Yangpu too.

There are about 300 households in his compound, Xiao said, and at least 10 of them are Nike employees. "A lot of friends told me to rent here. Yongkang Road had just been closed off around then, and a lot of nice Western and Chinese restaurants moved into my neighborhood."

At 8:55 on weekday mornings, Xiao hurries to a shuttle stop five minutes from home and rides 30 to 40 minutes to Nike's headquarters. Nike runs 12 shuttle routes across the city, including a midday run to the university district at nearby Wujiaochang so employees can eat there. "When I first arrived there were only two restaurants out here, a Japanese place and a vegetarian place that has since closed. Nike has two canteens of its own, and they're very cheap — two yuan a dish," Xiao said.

Plenty of things shape what a new office location feels like: the building itself, but also the commute, the shopping, lunch, how far you range in a day. We talked to several office workers. Some commute in, as Xiao does; others chose to rent near the company, which amounts to trading one life for another.

Lin Miaozhi works at Trip.com Group. The company's new address is only a kilometer from the old one, and she still finds it "relatively less convenient." In 2014, Trip.com Group paid 3.05 billion yuan for 100,000 square meters at Sky SOHO in Shanghai's Hongqiao area and moved in the following May, leaving the Trip.com network technology building on top of Songhong Road station. Sky SOHO, designed by Zaha Hadid, was certainly an upgrade as an office; the neighborhood around it was not. "People renting nearby basically survive on JD Daojia," she said. "They say an IKEA is going up next door. The land's been fenced off, but nothing's happened yet."

Mai Qi, from Hong Kong, is a colleague of Xiao's. He has been at Nike for ten years and moved with the company from Jing'an to Yangpu in 2014, into an apartment at Shangpu Mingdi that costs more than 10,000 yuan a month, a few minutes' walk from the office. "Yangpu property prices have changed unbelievably since day one. When I got here the apartment I live in now was selling for 4 million yuan. Now it's 12 million. Even Anfu Road, downtown, only goes for 13 million."

"The cost of living here is already about the same as Jing'an." Mai married and had a child six months ago — his wife is from Heilongjiang — and for the occasion he spent a year studying school districts and household registration and quizzing friends who are property agents. He now calls himself an expert. The people Xiao sees on the subway, Mai figures, must just be workers commuting into Yangpu. ("If you can pay 10 million for an apartment, are you still taking the subway to work?") He hasn't found a place with the right price and location yet, but he has grown used to what he calls "a low-density neighborhood of locals." "I go to Hopson One all the time now. Two whole floors for kids, an imported-goods supermarket downstairs, an Apple Store. It's just convenient. Once you're in Wujiaochang you never have to leave."

Hopson One, a mall in Shanghai's Wujiaochang that opened in 2016, is the last of Wujiaochang's "corners." Next door, one of the most profitable Wanda Plazas in the country has just finished a nine-month overhaul: the gold and jewelry hall on the ground floor became a 10,000-square-meter sportswear zone, and the world's second Nike flagship store opened there.

Under the Shanghai Master Plan released in January 2018, Shanghai is in a phase of "becoming an outstanding global city," and the non-CBD districts stand to gain from it. The plan introduces the term "Central Activity Zone" (CAZ) in place of the older "Central Business District" (CBD), and it covers every area named in JLL's report. In the previous plan, ten years earlier, these places were still called "urban sub-centers."

Location still matters most in commercial property. For Shanghai's office market, it may simply mean there are now more good locations.

The most direct thing that makes a location worth more is still transport. Shanghai's metro plan calls for more than 830 kilometers of track in operation by the end of 2020. That has both lengthened and shortened people's sense of distance. Mai goes to the NikeLab downtown at least eight or nine times a month: "The Yan'an elevated road is always jammed — an hour by taxi, but only 40 minutes by subway, and you can grab a Mobike at each end." It also leaves Lin, who lives right at the Songhong Road station exit, feeling that a 15-minute walk to Sky SOHO every day is a long way. On this point the flat, spreading metro network resembles the malls that follow it everywhere: it is hard to say whether it makes life more convenient or more confined.

There is a postscript on Sky SOHO. In October 2017, Pan Shiyi sold it to Gaw Capital for 4.944 billion yuan, which was read as a sign that the capital markets had changed their minds about what Shanghai commercial projects are worth. The 23.6 billion yuan Pan has raised by selling off office projects became the purse for his bets on coworking. As we have reported, coworking has become a business that cares more and more about location.

When WPP first moved to Hengfeng Road, its creative agency J. Walter Thompson made a run of 100 posters listing reasons the move was worth it, from "new office desks and chairs" to "saving 50 yuan a day on parking" to "investing in shops near the train station." Reason No. 99 was a comparison: the walk from Exit 1 of Hanzhong Road station to the office is much shorter than the walk from Changshu Road station to the old office at Century Trade Plaza.

Century Trade Plaza's great advantage was a busy, central address, which is also a matter of vanity. Burson-Marsteller was among the first WPP companies to move to the train station; its old office, Boyin Tower on the Huaihai Road shopping strip, was just as well placed, right beside Xintiandi, the shikumen redevelopment. "The standard of service over there is different from around the train station too," said Shu Ping, Burson-Marsteller's deputy administration director.

When Shu first spoke to QDaily two years ago, she said a work lunch used to average 50 yuan, and after the move 20 or 30 would do. But "it's starting to get expensive again now," she told us over WeChat, while eating with colleagues at the Meiwei Meiguo hotpot place on level B2 of CapitaLand Xingmao.

As head of administration, Shu signed an agreement in late 2016, on behalf of the staff, with a yoga studio in the nearby Qiye Gongguan building, so employees can take a free yoga class every week. Qiye Gongguan is the third phase of the train station's Enterprise Square office complex, opened in 2016; its biggest difference from the older buildings is a cross-shaped pedestrian street through the atrium, home to Chuan Zao, a Sichuan restaurant Shu discovered recently, and Aladdin Mala Tang, which is "clean but a bit pricey." The office floors already hold 25 companies, including Diageo, Suntory and Seiko.

Companies move for all kinds of reasons: more floor space, better connections, office requirements, an upgrade. WPP's Dabang Collaboration Plaza covered nearly all of them. "Reason No. 45 to move: floor space per employee in WPP's new building goes up 10%." "One of the largest co-location office projects ever." "80% of the furniture is MATSU, the rest international brands like Vitra and Hay." "Lots of air purifiers went into the ceiling — the old building had none."

A steady supply of new Grade A buildings outside the CBD can satisfy a company's wish to move up to better space, and the survey results in JLL's report bear that out.

"I think 2.7 meters is high enough. In future office space a lot of the suspended ceilings are actually coming out, so slab to slab is quite tall," Yao told QDaily. The mid-tier tenants who make up 53% of Shanghai's office market are in fact rather sensitive to rent, and a higher-quality building does not mean much to them.

Rent is still the first thing a company weighs when it picks an office. Figures from the property consultancy Cushman & Wakefield put average non-CBD office rent at about half the CBD level, and JLL's survey ties that rent gap to the cost of moving. "New fit-out, IT equipment, labor for the move, buying office supplies — that all counts as relocation cost, and in Shanghai it averages roughly 2,500 to 4,500 yuan per square meter," Yao said. Administrative staff spread the relocation cost over the lease and set it against the rent gap; if the two match, the company has at least gotten a free upgrade in office quality. The appetite to move is strongest when the gap is around 2 to 3 yuan per square meter per day.

Take CapitaLand Xingmao. According to the landlord, a 350-square-meter office can fetch 9 yuan per square meter per day, already close to the 11.6 yuan average for downtown offices. For a company that wants better space, it is still a good deal.

Sometimes it is not the company's move that pulls employees along but the reverse: the talent already in an area becomes a big reason a company picks it. Wujiaochang is the classic case. Ma Ling, who used to work at consulting and investment firms, now runs his own startup, with an office leased at Chuangzhi Tiandi in Wujiaochang. "I'm paying just under 6 yuan, which counts as cheap — nearby it's over 8. And Yangpu suits a startup environment... Fudan, SUFE and Tongji are all right there, so interns are easy to find too."

Pushed by demand and by the way the city is growing, the capital markets have been placing bet after bet outside the CBD. On July 28, 2017, Kechuang took plot 01C2-02 in the Pingliang community of Yangpu District for 967 million yuan, and the same day Daren spent 112 million yuan on plot 062-02 in the Changhai community. On December 19, CapitaLand Group bought plot 407 in Xinjiangwan, Yangpu District, for 838 million yuan — about 38,000 square meters of floor area, planned as Grade A offices.

Walk along Hengfeng Road, where WPP is, to the Hanzhong Road intersection and you will easily spot an unmarked construction site. According to a security guard in the building across the street: "I hear they're putting up another office tower here, the kind with a mall underneath."

Talking about the "luxury housing area" next to Nike's headquarters, Mai said: "A friend in real estate told me the big empty lot behind us will get a huge mall in six or seven years, something like Taikoo Hui."

Shanghai's traditional CBD means Lujiazui in Pudong, the Bund area in Puxi, Nanjing West Road and stretches of Middle Huaihai Road. Today it is more scattered, and it is spreading in two directions. One looks like an extension of the traditional CBD — North Bund, for instance, separated from Lujiazui by a single tunnel. The other is a more independent kind of growth, such as the Hongqiao Business District and the Qiantan International Business District built by the Lujiazui Group.

All of it has become part of how Shanghai expands. The Central Activity Zone drawn in the plan covers roughly 75 square kilometers and takes in Shanghai Railway Station, Expo–Qiantan–Xuhui Riverside, Xujiahui, the Hongqiao Development Zone, Suhewan, North Bund, Yangpu Riverside inside the Inner Ring, the Hengshan Road–Fuxing Road area and more.

There are plenty of precedents, of course. Manhattan, 57.9 square kilometers in all, is only 7% of New York City's land, yet its economic pull is enormous. Ten years ago, working people priced out of Manhattan began moving to Brooklyn and gradually filled its rowhouses; once Brooklyn filled up, Manhattanites poured into Queens. Tanya Reiff, an agent at the American luxury property firm Halstead Property, told reporters: "About two years ago we suddenly realized Brooklyn prices were already as high as Manhattan's." Some in the industry think the talent in Queens will keep drawing more big companies.

Five years ago Hong Kong started developing its Eastern District, population 580,000, beyond Central, Causeway Bay and Tsim Sha Tsui. Its Grade A office stock can now match Tsim Sha Tsui's, and what drove it is the same list: rent, the quality of new buildings, transport.

Shanghai's CBD is scattered and irregular. Even Lujiazui faces the Bund across the river, and Nanjing West Road is a thin strip. As more big companies move out, Shanghai's CBD character may blur further. "This is really just the natural process of an office market's tenant mix restructuring," Situ Taishan, head of Cushman & Wakefield's Shanghai commercial department, said in 2014, when Nike moved to Yangpu. "General Motors moved to Jinqiao years ago. AstraZeneca went to Zhangjiang. Micron moved from Jiahua Center on Middle Huaihai Road to Caohejing."

"Tech companies used to sit in industrial parks, in Caohejing and Zhangjiang. But to improve the quality of their offices, to find amenities and customers, and to keep better employees, they upgrade to Grade A." Shanghai's macro policy, Yao said, "used to be about being a center for the economy, finance, trade and shipping. Now technology and innovation has been added. Finance and tech are coming together fast, and Shanghai may see a new wave of demand in the near to medium term."

It looks like a gamble. By Colliers International's latest count, the average vacancy rate for Grade A offices in central Shanghai climbed 4.6 percentage points in 2017 to 14.8%, the highest since 2009.

Perhaps the only real question left is whether the economy stays active enough for more companies to lease bigger offices, and for more companies to afford Grade A space. Roughly 2 million square meters of new office supply is coming into this market.

Not every office building gets to land a tenant like WPP, the way Dabang Collaboration Plaza did.

(At the interviewees' request, Xiao Xiaozuo, Mai Qi and Lin Miaozhi are pseudonyms.)

Graphics: Feng Xiuxia