ctbuh.org/papers

Title: The Emergence of Asian Supertalls

Authors: Jonathan Hsu, Director, CBRE Cynthia Chan, Senior Analyst, CBRE

Subject: Economics/Financial

Keywords: Cost Office Supertall

Publication Date: 2014

Original Publication: CTBUH Journal, 2014 Issue IV

Paper Type: 1. Book chapter/Part chapter 2. Journal paper 3. Conference proceeding 4. Unpublished conference paper 5. Magazine article 6. Unpublished

© Council on Tall Buildings and Urban Habitat / Jonathan Hsu; Cynthia Chan Economics/Financial The Emergence of Asian Supertalls Within Asia, a high density of tall buildings is viewed as being synonymous with being a successful financial hub. It is widely believed that constructing supertall office buildings can enhance the competiveness of a city’s business environment. Authorities in a number of markets have pursued this strategy as a means to establish their city as a financial center or to reposition their econo- mies. This “build and they will come” approach has been adopted in several Jonathan Hsu Cynthia Chan emerging financial markets across the region, with limited degrees of success.

Authors Introduction resulted in higher rents, which predominantly Jonathan Hsu, Director Cynthia Chan, Senior Analyst financial sector tenants were able to afford. This CBRE Asia-Pacific Headquarters The creation of financial centers has meant that supporting industries had to move 12/F, Three Exchange Square 8 Connaught Place Central, Hong Kong traditionally underpinned the development of out and locate themselves some distance from t: +852 2820 2957 tall buildings in major cities worldwide. Prior to the clients they served. Financial sector f: +852 2810 0830 e: [email protected]; the advent of computers and the adoption of occupiers therefore came to dominate CBDs, [email protected] the Internet, there was a strong need for and financial hubs began to emerge. http://www.cbre.com.hk accounting, auditing, consultancy, and law firms to be in close proximity to each other in The pattern of vertical development is best Jonathan Hsu Hsu joined CBRE in June 2013 as director of the order to service key clients, such as large illustrated by the Manhattan borough of New Asia-Pacific research team, leading the fundamental financial institutions and major corporations in York City, which has been the leading global analysis for the office, retail, and industrial subsectors from a regional perspective. He is responsible for other industries. As the financial sector financial center since the 1920s. Over the past forming and delivering the regional occupiers’ strategy expanded, the size of supporting industries century, the skyline has evolved with the to internal business lines and to CBRE’s key clients in the region. Prior to CBRE, Hsu covered listed real-estate increased in proportion. completion of numerous tall office buildings securities in Asia as an equity research analyst. As vice housing large financial institutions and major president at Barclays, Hsu covered listed developers and landlords in Hong Kong and China. Prior to this, This led to rapid growth in demand for office corporations. New York City continues to have he served as associate director of the UBS Global Real space and stimulated the expansion of Central the highest number of tall office buildings in Estate Strategy team. Business Districts (CBDs), vertically and/or the world, followed by Shanghai, Tokyo, Hong

Cynthia Chan horizontally. The adoption of the safety Kong, and Chicago (see Figure 1). With the Chan joined CBRE in mid-2010 as senior analyst of and advent of steel-frame construction exception of Shanghai, all of these cities are the Asia-Pacific research team. She has been working closely with local research members to conduct facilitated the vertical development of office traditional financial centers. fundamental analysis for the retail and industrial space to accommodate growing demand. sectors from a regional perspective before a recent focus on the office sector. She is also assisting in the Examples of vertical expansion include New New York, London, Hong Kong, Singapore, and delivery of regional occupiers’ strategy to CBRE’s York, which is home to the largest number of Tokyo all rank highly on the Global Financial key clients in the region. Before joining CBRE, Chan 1 worked as an equity research analyst to cover listed tall office buildings in the world. Centres Index (GFCI), a ranking of the conglomerates in Hong Kong. Prior to this, she started competitiveness of global financial centers. her career as an analyst in real estate direct investment. Increasing demand for CBD space, combined Three out of the top six cities are in Asia, and all with the gradual rise in construction costs, these cities have a large number of tall office buildings. The high profile of these cities has created the perception that mature global financial centers are comprised of tall building clusters. In Asia, a high density of tall buildings is viewed as being synonymous with being a 152 successful financial hub. Numerous city leaders are seeking to mimic the success of the likes of New York, Hong Kong, and Singapore. They do

96 1 The Global Financial Centres Index is a ranking of the 75 69 competiveness of 83 financial centers based on over 62 25,000 financial center assessments from an online ques- tionnaire, together with a total of 103 instrumental factors from organizations such as the World Bank, Economist Intelligence Unit, and the United Nations. Ratings in the Figure 1. Cities with the largest number of tall office buildings (150+ m). Source: CBRE Research/CTBUH, June 2014. GFCI 15 range from 423 (Athens) to 786 (New York).

28 | Economics/Financial CTBUH Journal | 2014 Issue IV so by adopting a “build and they will come” The Emergence of Asia as Hub dramatically in the early , with strategy of constructing tall office buildings For Tall Office Buildings completions growing at an average of 40 new with high specifications to attract financial tall office buildings per year. In comparison, the sector companies as a means to establish The development of tall office buildings in United States currently sees the completion of their city as a regional financial center (see Asia began relatively recently, at the end of an average of six new tall office buildings per Figure 2). the 20th century. Construction accelerated year. As of June 2014, Asia was home to 55% of the total number of tall office buildings globally 160 (see Figure 3). On a country level, China

140 accounts for around one-third of existing tall office buildings worldwide. 120 In recent years, governments in a number of 100 countries in Asia have supported the construc-

80 tion of supertall office buildings, defined as a building with a height of 300 meters or greater 60 (see Figure 4). Supertall office buildings are viewed by authorities as a means to enhance 40 the competiveness of their business environ- ment so their city can establish itself as a Existing number of tall office buildings 150 m+ Existing number of tall office 20 financial center. Shanghai World Finance Center 0 (SWFC) and Guangzhou IFC were constructed 550 600 650 700 750 800 in accordance with this strategy. Global Financial Centre Index

Figure 2. Global financial centers and their tall office-building numbers. Source: CBRE Research / CTBUH / Z/Yen Group, June 2014 1,800 Steps to success: Leverage 1,600 ASIA THE AMERICAS MIDDLE EAST strong relationships EUROPE OCEANIA 1,400 Supertall office buildings in Asia tend to be 1,200 developed with a high degree of government involvement. Guangzhou IFC was primarily 1,000 developed by Yue Xiu Properties, a company 800 established by the Guangzhou government to pursue economic and trade development 600 opportunities in Hong Kong. KK 400 100 was constructed by Kingkey Real Estate Development Company Limited, whose 200 founder is a high-profile member of various 0 civil service organizations, such as the Chinese 1909 1930 1953 1965 1975 1985 1995 2005 People’s Political Consultative Conference and Figure 3. History of the construction of tall buildings. Source: CBRE Research / CTBUH, June 2014 the Political Consultative Conference.

That said, the challenges and complexity involved in constructing a supertall office 6 building often necessitate the participation of 6 a more experienced partner from overseas. 5 5 For example, Shanghai World Financial Center 5 5 was developed by Japan-based Mori Building 4 4 Company and constructed by the Shanghai 34 4 State Construction Group, which is currently developing the , a new Figure 4. Cities with the largest number of supertall office buildings (300+ meters). supertall office building in the same city. Source: CBRE Research / CTBUH, June 2014

CTBUH Journal | 2014 Issue IV Economics/Financial | 29 In other countries, the impact of globalization Key Drivers of Leasing Office Space power back-up, air-conditioning and water and the relocation of manufacturing In Asian Supertalls supply systems are generally of a much higher operations to cheaper markets have standard than in other Grade “A” office prompted authorities to reposition their CBRE Research recently conducted a survey of buildings. economies and encourage the development its office leasing agents in key markets around of the financial sector. The construction of the region, asking them to rank the various Large floor plates are another feature of supertall office buildings has been a key criteria influencing a company’s decision to supertall office buildings. Multinational tenants component of this strategy. For example, lease space in a supertall office building (see – particularly those in the financial sector – 101 was constructed as part of a move Figure 5). generally prefer large floor plates. to grow the financial industry in . In Kuala Lumpur, the were built The positive image and branding Many supertall office buildings are mixed-use; in accordance with the government’s wish to associated with supertall office buildings is this creates an efficient and integrated vertical reduce Malaysia’s dependence on the oil and often cited by tenants as a key reason behind community. Tenants of supertall buildings can gas industry and develop its financial sector. their leasing decision. Occupiers frequently utilize retail, hospitality, and other services Elsewhere, the – the tallest use their location in tall office buildings as a within the same building. For example, the building in the world – was built as part of the marketing tool to boost their corporate image SWFC includes office facilities, the 15-floor Park United Arab Emirates’ government plan to and branding. Hyatt hotel, 25 restaurants, and 3 floors of gain more international recognition for shopping facilities. For occupiers, the ability to and help support the growth of the country’s Most supertall office buildings are very well offer a range of facilities to their clients and staff services sector, while reducing its reliance on located in prime districts or newly developed is a major draw. the oil industry. CBDs. These locations boast high standards of infrastructure and connectivity to Why do tenants occupy space in supertall transportation networks. This is particularly office buildings? Steps to success: Enriching the true in a number of major cities in China, , Taipei: “Supertall office buildings can occupier experience where local authorities are supporting the improve tenants’ recruitment and retention of creation of new CBDs as means of city staff. Potential employees believe it will be a In recent years, developers have sought to redevelopment and infrastructure investment. comfortable and prestigious working location.” create vertical communities in supertall office buildings by integrating work areas with retail, The building quality of supertall office SWFC, Shanghai: “Supertall office buildings hospitality, residential, and leisure facilities, in buildings is very high. Planning, designing, provide tenants with spectacular views of order to enrich the experience of occupiers constructing, and operating a supertall office surrounding areas such as mountains, harbors, and other users, with the ultimate aim of building is very demanding and must and cityscapes.” enhancing the image and prestige of the overcome numerous challenges, including building. These components can include: wind and earthquake resistance, fire Kingkey 100 (KK100), Shenzhen: “The property separation and elevator connectivity. The management of supertall office buildings is ƒƒ Luxury hotels – Guangzhou IFC, SWFC, and KK 100 all have five-star hotels on the top. Note: 14 of 29 supertall office buildings in Asia were included in the survey ƒƒ Executive Clubs – Occupiers can use based on the opinion of CBRE office brokers directly involved in the leasing of executive clubs to host/entertain senior space in supertall office buildings. Each factor is independent and maximum 4 staff and clients. score for each factor is 5. ƒƒ Observation floors – Hong Kong ICC, KK100, and Taipei 101 have observation 3 decks on high floors with public access. , Guangzhou has an observation wheel on the top floor. 2 ƒƒ Fireworks, lights, and music shows – Taipei 101, Hong Kong ICC, and KK100 launch firework displays and light and music 1 cost plate shows during major festivals. LEED High- Brand quality Image/ Building Location ƒƒ Filming locations – The high profile and Property Sea view/ Large oor Large Real estate Real estate & retention

iconic look of supertall office buildings management eciency ratio mountain view mountain

means they are often featured in major recruitment Sta movies. Figure 5. Factors influencing tenant selection of space in supertall office buildings. Source: CBRE Research / CTBUH, June 2014

30 | Economics/Financial CTBUH Journal | 2014 Issue IV performed to a very high standard, particularly Supertall Office Buildings’ Tenant Mix region, accounting for 16% of total occupied maintenance, security, and upgrading.” space. Supporting business units such as Authorities in a number of cities in Asia are accounting, consulting, and legal firms need Do supertall office buildings command a supporting the construction of supertall office to be in close proximity to the companies rental premium? buildings, as they believe it will help them they serve in the banking and financial The completion of supertall office buildings establish their market as a financial center. One services sector. sometimes initially results in a slight market straightforward way to assess whether this supply imbalance. However, the key objective has been achieved is to look at the The TMT sector is an up-and-coming user of differentiators identified above enable supertall tenant mix of supertall office buildings. supertall office buildings and now accounts office buildings to command a rental premium for 11% of total occupied space in such over other Grade “A” office buildings in the The Downtown district of Manhattan – home buildings in the region. Occupiers in this same (sub)market after the first rent review to Wall Street – is regarded as one of the world’s sector have been increasingly active in leasing cycle. This rental premium is between 10–40% leading financial centers. In this market, tenants prime space in recent years and are upgrad- above the average Grade “A” rent in the same in the financial services, business services, and ing from decentralized areas offering cheaper submarket. However, the key differentiators of legal sectors occupy the bulk of space, rents. supertall office buildings vary by market, accounting for 58% of total tenants. Occupiers meaning that the rental premium can also vary. in the real-estate and technology, media, and Within Asia, certain cities and certain For example, rents in Taipei 101 are only 5–10% telecommunications (TMT) sectors are also buildings have been more successful in higher than in other Grade “A” buildings in the increasing their footprint in the area (see attracting financial sector tenants. Supertall Xinyi CBD in Taipei. In Shanghai, however, the Figure 7). office buildings such as Two International SWFC commands an average rental premium Finance Centre (Two IFC) and the Interna- of more than 30% compared to other Grade “A” The analysis reveals that, perhaps tional Commerce Centre (ICC) in Hong Kong office buildings in the Pudong submarket unsurprisingly, the tenant mix in supertall office – an established financial hub – understand- where it is located. buildings in Asia is similar to that in the ably have a high proportion of financial-sector downtown district of Manhattan. The banking tenants. However, a look at the tenant mix of Rents in supertall office buildings also vary and financial services sector accounts for individual buildings in emerging financial significantly between the upper and lower around 55% of the total occupied space in hubs in the region presents a different picture. zones, usually between 50–100%. This is partly supertall office buildings across Asia. Occupiers One success is the SWFC. More than half of explained by the fact that large occupiers or in this sector lease space in supertall office the space in the building is occupied by anchor tenants are frequently offered reduced buildings because of the key differentiators tenants from the financial services sector. The rents to fill in vacant space on lower floors outlined above, and also because many of Shanghai government has provided attractive during the preleasing stage, while upper floors them receive incentives from authorities keen tax incentives to banking and financial are reserved for tenants willing to pay higher to expedite the development of their markets services firms to take up space. rents for the most prestigious space in the or a specific district into a financial center. building (see Figure 6). The performance of other supertall office Business-services and legal firms are another buildings in emerging financial centers in Asia key occupier of supertall office buildings in the

3% Hong Kong China Taipei Tokyo Seoul Singapore 3% 600 240 3% 4%

500 200 6% Non-profit 400 160

300 120 9% 43% Other Financial Service 200 80

Height of buildings (m) Height 100 40 Rent (US$/sq. ft./annum (US$/sq. Rent 13% 0 0 Government

15%

SWFC Business

Two IFC Two Service Three IFC Three Taipei 101 Taipei North Tower Central Plaza Central Beijing China World Tower 3 Tower World Hong Kong ICC Guangzhou IFC Midtown Tower Midtown One Raes Quay

Shenzhen KK100 Financial Services Real Estate Other

Marina FInancial Bay Technology Government Arts & Recreation Meters Building rent Submarket average rent II Tower O ce Centre Non-profit (US$/sq. ft./annum (US$/sq. ft./annum Business Services Education Figure 7. Tenant mix of office buildings in downtown Figure 6. Rental differential between supertall office buildings and their submarkets. Source: CBRE Research Manhattan. Source: CBRE Research

CTBUH Journal | 2014 Issue IV Economics/Financial | 31 100% critical mass of financial- and related-sector tenants.

75% These examples underline the fact that Others attempts to develop cities into national or Transportation international financial centers by constructing Energy supertall office buildings to attract the finance Tech. & Telecom 50% sector have been largely unsuccessful. The Real Estate 85% Legal “build and they will come” strategy adopted 65% Insurance by emerging financial centers in Asia has not 54% 25% Business Services worked. While Shanghai has attracted a 36% 36% Financial Services steady flow of financial sector occupiers and is 33% 29% making gradual progress towards establishing itself as a financial hub, other cities have been 0% Taipei 101 SWFC Hong Kong Hong Kong KK100 Guangzhou Beijing unable to attract the same caliber and volume ICC Two IFC IFC CWT 3 of tenants, despite constructing high-quality Figure 8. Tenant mix of major supertall office buildings in Asia. Source: CBRE Research supertall office buildings. 20 Emerging markets Shenzhen (43) This reflects the reality that there are far more 18 Jakarta Shanghai important success factors required than the 16 mere construction of supertall office buildings Beijing 14 for a city to establish itself as a regional or Istanbul Dubai global financial center. These factors include 12 New York the business environment, legal, and tax 10 Kuala Lumpur London systems, market transparency, political stability, government efficiency, transport, and 8 Sydney Toronto telecommunications infrastructure, capital 6 Mumbai flows, human capital, and reputational factors Taipei Mexico City Abu Dhabi Chicago Seoul 4 Melbourne Busan Tokyo Singapore such as innovation. Cities such as Zurich, Frankfurt Geneva, Luxembourg, and Washington D.C., Hong Kong 2 are all ranked in the top 20 of the GFCI, but do Paris San Francisco Boston Mature markets Number of tall office buildings in the next 5 years (150 m+) buildings in the next 5 years Number of tall office 0 not have any office buildings taller than 150 550 600 650 700 750 800 meters. Global Financial Center Index

Figure 9. Global financial centers and the new supply of tall office buildings. Source: CBRE Research / CTBUH / Z/Yen Group, June 2014 The Future Supply of Tall and Supertall has been mixed (see Figure 8). The likes of For example, a number of major real estate Office Buildings in Asia KK100 in Shenzhen, Guangzhou IFC in companies are headquartered in Guangzhou. Guangzhou, China World Tower 3 in Beijing, Several of these firms have taken space in Most attempts by emerging cities to establish and Taipei 101 in Taipei all have a relatively Guangzhou IFC for self-use; the proportion of themselves as financial centers via the lower proportion of financial sector tenants. space occupied by tenants in this sector is construction of supertall office buildings have Nevertheless, although the Cai Wu Wei therefore similar to the proportion of space so far been unsuccessful. However, the submarket of Shenzhen caters mostly to the occupied by financial-services firms. Another development pipeline of tall office buildings technology and telecommunications sector, example is Beijing, where oil and energy in emerging markets such as China, Indonesia, KK100 has still managed to attract a higher companies are among the major drivers of Malaysia, and India remains significant (see proportion of finance-sector tenants compared office demand. Many large oil and energy Figure 9). to other Grade ”A” buildings in the district. companies have leased space in China World Tower 3 as their headquarters. Markets in China account for almost 60% of In other cities, the industry specification of the the total new supply of tall office buildings set local market has impacted the tenant mix of In Seoul, the local government planned the to be completed worldwide within the next supertall office buildings. This partly underlines creation of the Yeouido Business District five years. Several Tier II cities in China aspire why the “build and they will come” strategy is submarket as a new financial hub. The area is to establish themselves as national or often not as successful as expected. It takes home to a number of tall and supertall office international financial centers. This has time for the local market to refocus and adapt. buildings, but has so far failed to attract a resulted in government master planning to

32 | Economics/Financial CTBUH Journal | 2014 Issue IV 20 18 Steps to success: Begin pre-leasing early 16 Most development in Asia is speculative, meaning that landlords often 14 find their building becomes exposed to the risk of low occupancy during a 12 market downturn. Major new office projects typically begin pre-leasing 10 one year ahead of completion. Supertall office buildings usually begin pre-leasing two years ahead of completion, as they have such a large 8 volume of space to fill. 6

4 Beginning pre-leasing early is a crucial part of the process of establishing a

2 supertall office building’s credentials as a viable business location. A sizeable early letting to a reputable anchor tenant can also stimulate Number of completed supertall buildings Number of completed o ce 0 Shenzhen Shenyang Chongqing Tianjin Nanning interest from other occupiers. SWFC, Ping An Financial Center in Shenzhen, China Tier 2 cities and Guangzhou IFC all began pre-leasing two years ahead of completion. Figure 10. Future completion of a large number of supertall office buildings in China Tier II cities. Source: CBRE Research / CTBUH, June 2014 allocate and encourage developers to build CBRE Research believes that the existence and Still, landlords of tall and supertall office tall office buildings in new and existing CBDs. future completion of a large number of buildings can command a rental premium; Tier II cities comprise around 80% of the total supertall office buildings in Tier II cities such as gain international recognition from their supply of tall office buildings in China Shenyang, Chongqing, and Tianjin (see Figure high-profile projects, and raise industry scheduled to be completed within the next 10) undoubtedly creates a risk of oversupply. standards and expectations related to five years, or roughly 47% of total new supply These cities are merely regional hubs within construction and property management. of tall office buildings globally. China – not national or international financial centers – and lack the means to attract a Occupiers can benefit from the positive China also dominates the development significant volume of financial sector image and branding associated with being a pipeline in the category occupiers to their market. Local governments tenant in a tall or supertall office building, and over the next five years. The country accounts should therefore be more realistic when from proximity to supporting industries or for 71% of the total future supply of supertall forecasting office demand and planning land services; being situated in a prime district or office buildings to be completed in the next supply, in order to ensure their cities’ stable newly developed CBD, and the flexibility and five years, with Tier II cities accounting for 51%. economic development. convenience afforded by large floor plates. Other benefits include enhanced staff While new supply of supertall office buildings recruitment and retention, high standards of continues to increase, the recent slowdown in Conclusion property management, spectacular views, the Chinese economy, combined with tighter sustainability and in-building access to controls on the “shadow banking” industry, Over the next five years, the number of services such as retail and hospitality. has resulted in weaker demand from the supertall office buildings in China and South financial sector. This has led to growing Korea will surge, while Indonesia (Jakarta) will Attempts by cities to establish themselves as concerns of oversupply in a number of see the completion of its first supertall office financial centers by constructing supertall markets. Some observers argue that oversup- building in 2015. Financial sector demand will office buildings to attract financial sector ply is not an issue in the long-term, as they be insufficient to fill the large volume of new tenants have largely been unsuccessful to expect demand to gradually catch up with supply, but this could provide opportunities date. For such an approach to succeed, it supply in Tier II locations as these cities for multinational occupiers in other sectors to must be implemented in tandem with various mature, pointing to the pattern of office secure high-quality and prestigious office other measures, such as creating a healthy development witnessed in Beijing and space in good locations for relatively cheap business environment, ensuring political Shanghai in recent years. Although office rents. stability, establishing effective legal and tax demand in China will continue to rise in the systems, and investing in hardware and long term as the country continues to CBRE Research has identified all these markets software infrastructure.  transition to a tertiary industry-driven as having a high risk of oversupply in the short economy, the level of demand in Tier II cities term. This pressure is unlikely to diminish in A version of this report originally appeared as an will remain relatively weak compared to the medium term, and rental growth in these independent document released by CBRE Global Beijing and Shanghai, as these two markets cities is likely to lag behind other Asia-Pacific Research and Consulting in July 2014. are already firmly established as the country’s markets. political and financial hubs.

CTBUH Journal | 2014 Issue IV Economics/Financial | 33