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REAL ESTATE: The Rise of E-commerce is Impacting Tianjin’s Commercial Real Estate
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The growth of e-commerce in China has been astonishing. As my colleague Warner Brown points out in his blog post, Why China’s Mass Market Malls Should Fear The Rise of Online Apparel Sales, China’s e-commerce market has developed from insignificance just a few years ago to become the world’s second largest. From 2008 to 2012, online sales went from 1% of total retail sales to 6%, increasing nearly tenfold and experiencing growth rates significantly higher than total retail sales. Retail sales of e-commerce reached approximately 1.2 trillion in 2012 and by 2013 Bain & Company forecast that online shopping by Chinese consumers will surpass that of the United States, which is the country that currently spends the most on e-commerce. The rapid growth in online shopping has already begun to impact Tianjin’s commercial real estate markets and will create significant investment opportunities for investors. However, the rise of e-commerce will not benefit all sectors of commercial real estate.

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One sector in Tianjin that has been positively affected by the increase in online spending has been the warehouse market. Third-party logistics providers (3PL) and e-commerce companies, such as Alibaba and Amazon, have been driving demand for warehouse space in the city over the last several quarters, helping to keep warehouse occupancy rates at relatively high levels. New projects in the city are quickly being leased prior to completion as quality warehouse space has been in short supply across the Bohai region. Thus, Tianjin’s non-bonded warehouses (the primary type that e-commerce companies lease) have maintained occupancy rates above 90%, despite continuous increases in new supply. 

Further driving demand for warehouse space in Tianjin has been the limited amount of availability in Beijing; the current occupancy rate there is well above 95%. With vacancy rates so low in the capital, firms are being forced to move outside of Beijing because they cannot find suitable locations. As my colleague Christopher Clausen indicated in his blog post, E-commerce Firms Changing Distribution Strategy, several of the largest e-commerce companies (by gross merchandise volume) have begun establishing fulfilment centres of 100,000 sqm or more in Tianjin, because expanding operations in a single space that size in Beijing would be extremely difficult, if not impossible. Tianjin’s warehouse market is expected to continue to benefit from Beijing’s limited supply, as the Beijing government has been reluctant to allocate land for warehouses because they do not generate significant amounts of tax revenue. Areas in particular that will receive positive gains are Wuqing and Beichen Districts in Tianjin, which boast excellent highway infrastructures and lie between Beijing and central Tianjin.

The office market will also see benefits from the rise in e-commerce. The fact that Tianjin is a port city means that a significant portion of office tenants are logistics companies. A growing and robust online sales market will bring more third-party logistics companies to the city and give reason for logistics companies to expand their office space. In addition, with growing demand for online retail in Tianjin itself, we expect to see more online retailers establish small amounts of office space in the city.

For developers of shopping malls and department stores, especially of mass market projects, the growth in e-commerce will and is already having a detrimental impact on rents and turnover. As the chart above shows, sales growth for the top ten online retailers far exceeds the sales growth of the top ten department stores. Part of the reason for the strong growth in online retail sales is the number of people with access to the internet in China. In 2003, only 6.2% of Chinese citizens had access to the internet, in 2012 that number stood at 42.3% and China had over 175 million subscribers to fixed broadband internet, which was almost double that of the United States – the number two country. More importantly, the reason that online shopping has become a more attractive option than consuming at shopping malls or department stores is that many products can be purchased online at a discount compared to brick and mortar stores.

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The shift to online consumption will have a greater negative impact on mass market retail projects and shopping malls and department stores that offer very little in terms of entertainment, F&B and other services. Recently, Steven McCord, local director of China retail research at Jones Lang LaSalle, said in the South China Morning Post, "Low-end, strata-sold shopping malls will be the first to lose out from the rise of the likes of e-commerce portal Taobao, while mid-market malls are being forced to look at reorienting tenant mix and mall design around entertainment, services and other experience-related offerings." In essence shopping malls and department stores will need to offer more than cheap clothing to survive in today’s changing retail environment, which means many of the shopping malls on Nanjing Road and Binjiang Dao, such as Howhy and Maigo Leisure Plaza, will need to think of innovative of ways to differentiate themselves not only from the competition in the local market, but also online.

Occupancy rates in shopping malls will also be affected by the move to e-commerce. Today, many shopping malls can count on large box retailers such as Suning and Gome to take-up significant space in projects. However, with companies like Gome facing pressure from online retailers and their online sales experiencing rapid growth rates, these firms are looking to downsize their stores and consolidate within cities. Even supermarkets are looking to increase their online footprints. At the same time as demand from large box retailers is expected to decline, more shopping malls are planning to open across the city. Thus, we expect vacancy rates to increase as the market sorts out winners and losers among retail projects.

All this does not mean that future retail projects are doomed to fail. On the contrary, landlords and developers will just need to work harder to attract consumers to projects, and bringing in new tenants that can attract people away from their computers and smartphones and into shopping malls. However, for investors that think the retail market is too risky, the warehouse and office markets might be worth a closer look.

For more on e-commerce, check out our white paper, “E-Commerce: The New Black” and for regular updates on Jones Lang LaSalle’s views on property markets in China subscribe to our Real Estate Intelligence Service and read our blog: www.joneslanglasalleblog.com/APResearch/category/china. 
 

By Durrell Mack, Head of Tianjin Research, Jones Lang Lasalle
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