Commercial Real Estate Over Development

Earlier this week, my girlfriend and I went to see if there were any sales going on in the relatively new Xing Zheng Yuan Shopping Mall on Xi'an's East Street.

We were dumbfounded when we walked in the doors of the upscale shopping center. Not only were there no customers in the place, all the stores had been vacated by their tenants. The only people we encountered were the cleaners sweeping the pristine, unstrolled-upon floors.

As we made our way through the deserted corpse that is Xing Zheng Yuan, I was reminded of an article I just read the other day about China's commercial real estate catastrophe.

From The Los Angeles Times:

Reporting from Beijing -- "Empty," says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline.

"Beautiful building, but not a single tenant.

"Completely empty.

"Empty."

So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.

Beijing went through a building boom before the 2008 Summer Olympics that filled a staid communist capital with angular architectural feats that grace the covers of glossy design magazines.

Now, six months after the Games ended, the city continues to dazzle by night, with neon and floodlights dancing across the skyline. By day, though, it is obvious that many are "see-through" buildings, to use the term coined during the Texas real estate bust of the 1980s.

By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased.

"The scale of development was unprecedented anywhere in the world," said Rodman, a Los Angeles native who lives in Beijing, running a firm called Global Distressed Solutions. "It defied logic. It just doesn't make sense."

Read On

The numbers in this article are absolutely staggering. Of course, Beijing is a staggering city. I've been to Beijing three times, but don't feel as though I have anything more than a very superficial understanding of the place. My impression of the city is that it is so sprawling and huge that it would take months, if not years, for me to get a decent conception of.

Even if it is impossible to completely wrap one's head around the numbers of Beijing's vacant commercial real estate numbers (or the city itself), it's pretty obvious that its real estate over-development is an unmitigated disaster.

The hundreds (or is it thousands?) of buildings built and billions of dollars put into the projects is absolutely mind-boggling. It's obvious that the organizers of the Olympic Games (the Chinese government) got completely carried away in their drunken orgy of spending that occurred in the early to mid 2000s when credit was flowing like cheap baijiu at my favorite dish restaurant down the street.

It is a misconception to think that this commercial real estate boom was confined to the run-up to the Olympics in Beijing though.

This problem runs much deeper than just empty buildings in Beijing. I know this because I see the carnage of China's slowed commercial real estate development nearly every day in Xi'an (and Xi'an is by no means one of the top "boom towns" of China).

I live very close to Xi'an's Big Wild Goose Pagoda (大雁塔). It's a rather famous tourist spot in Xi'an built for Xuan Zang and his return from "the journey to the west."

The Chinese government obviously decided in the past couple years that the undeveloped area around the pagoda has the potential to be a robust tourist epicenter. Construction crews and cranes building shopping malls, hotels, and apartment buildings have been pervasive in the area for the two and a half years I've lived in southern Xi'an.

Below is a Google Map snapshot of the area just south of the Big Wild Goose Pagoda that I'm talking about. The pagoda is in the top left corner of the picture:



Admittedly, some of the areas in this photo are parks and areas that were never planned to be built up. But a huge chunk of that brown dirt in the bottom and bottom-left hand part of this picture is one day meant to be built up into commercial real estate or upscale apartment complexes. The area directly south of the pagoda which is currently completely unfinished will, supposedly, one day in the next few years be a massive upscale shopping city.

But recently I've begun to be skeptical about whether the pictures on the walls of the construction sites around the pagoda will ever be taken down to reveal buildings behind them. The cranes meant to be building up China's consumptive dreams seem to be stuck in place. This has to be because the free-flowing credit and capital that fueled these real estate-based fantasies has dried up.

I can't imagine that massive new shopping centers will continue to be built when places that have already been built are empty. (Many malls in Xi'an are in fact still bustling, but a lot of those malls are in the middle of 30% to 70% off fire-sales at the moment.)

The upscale Xing Zheng Yuan Shopping Mall that I mentioned at the beginning of the post on Xi'an's East Street is a ghost town only about a year and a half after it opened. Dozens of Italian shoe stores, Hong Kong-based jewelry stores, and designer watch outlets have all left. Walking on the second floor of the place, where the only store we saw still with a tenant was a Mickey Mouse brand shoe kiosk, is a very eerie experience indeed.