Mark Thornton, an American economist, wrote a book on economics: The Curse of Skyscrapers. The book’s argument is simple and crude. In a word, every time a new * tall skyscraper is built, the economic foam will break out, and the financial crisis will not be far away – this is the so-called “Curse of Skyscrapers”.
Skyscrapers are generally not residential buildings, as residential buildings cannot afford such high maintenance costs.
Taking Shanghai as an example, the monthly property management fee for a 30 story A-level office building is 30 yuan per square meter, which means that a company renting an office of around 200 square meters would need to pay 6000 yuan per month for property management.
This is about the maintenance cost of A-level office buildings in first tier cities, which is not even a super skyscraper. If it exceeds 50 floors, the maintenance cost will skyrocket.
Why is it said that building too many buildings can lead to a recession? The logical line is simple: low interest rates stimulate economic growth – hot money floods big cities – limited land and large amounts of money give rise to buildings – soaring costs lead to a decrease in profit margins in various industries – giving up the idea of renting buildings – vacancy.
That is to say, even if nothing else happens, Thornton believes that the more buildings are built, the more they will trigger a recession, and he predicted an economic crisis in 2020 in 2018 because it is expected to be the year when Saudi Arabia’s skyscrapers are completed.
Recent news seems to be supporting Thornton’s viewpoint.
Firstly, the Samsung Tower, which has been built for almost 10 years, has finally been completed in the CBD core area next to the East Third Ring Road in Beijing. This Samsung headquarters building has approximately 100000 square meters of office space, amazing!
I specifically searched for information about this building, and it is indeed a super modern intelligent office building that integrates offices, hotels, and commerce.
However, how much business does Samsung Group still have in China? Can you use up this building yourself? If you can’t use it all up, you have to rent it out. But what is the current office vacancy rate in Beijing?
According to the data of Cushman&Wakefield, the vacancy rate of Grade A office buildings in Beijing reached 16.2% in the first half of the year, 7.3 percentage points higher than that in 2019, a new high in the past 10 years; The report from CBRE also stated that the net absorption of high-quality office buildings in Beijing in the second quarter was -38700 square meters, negative for two consecutive quarters.
There are many more people who are terminating their leases than renting, including Beijing Financial Street, and the vacancy rate is also rising rapidly.
It is reasonable to say that the attraction of the Financial Street to financial institutions is OK. After all, there are more important financial management departments in China, such as the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and other higher financial decision-making and regulatory institutions in China. Almost all major decisions about China’s finance are brewing, discussed and eventually formed here.
However, the current situation is that even the office buildings here are lowering their prices. Previously, properties priced at 18-20 yuan/square meter/day are now priced at 10 yuan/square meter/day, resulting in a rent reduction of 45-50%.
Beijing is like this, how is Shanghai?
Last year, someone predicted that the vacancy rate of office buildings in Shanghai would reach 27% in 2020, before the impact of the epidemic was anticipated. However, the current real vacancy rate is likely to have exceeded last year’s expectations.
Macro data is still too abstract, and I am willing to share with readers a few small things that have recently dealt with office buildings.
A friend’s studio is located in a relatively old office building near Shanghai Railway Station. He told me that the building, which was quite lively last year, has already been vacated by two-thirds this year. There is only one company left on the same floor, and this one used to have more than ten employees, but now there are only two or three left.
Another out of town friend is going to Shanghai to open a company and rent a building. The author accompanied them through many buildings, and now there are fully decorated and furnished office buildings near Jing’an Temple, with a rent of just over 6 yuan/square meter/day, plus property management fees. The monthly cost of a 200 square meter office is only about 40000 yuan. And every building we visited had rental properties, with a significant increase in vacancy rates.
The joint office, which was once sought after by capital, has also been repeatedly reported to have closed stores and withdrawn this year.
According to a report in the Economic Observer, in July of this year, a shared office space of nearly 5500 square meters in two floors was swallowed in one go at the Taiping Financial Building in Lujiazui. Due to excessive rental pressure and a continuous decline in occupancy rates, the tenant chose to terminate the lease and close the store.
As a first tier city, what is the situation in Shenzhen? Equally pessimistic.
The topic of vacancy rate in Shenzhen in recent years is not a new one, and a vacancy rate of over 20% is not something that has happened in the past year or two. The financial center Qianhai, which was once highly anticipated, had a vacancy rate of 65.7%, and most of the office buildings were empty.
Has the era of large-scale CBD construction in various regions passed?
The former office building was the daughter of the emperor who didn’t have to worry about getting married. It wasn’t you who picked the building, but the building picked you. Why is the current situation of office buildings so bleak?
I think there should be several factors:
One is the wave of company closures and remote work caused by the epidemic. Many companies disappeared directly during the epidemic, and some companies were surprised to find that remote work could also meet most job requirements. So it’s better to move to a smaller office after the epidemic ends;
Secondly, the overall environment is not favorable, and amidst the wave of decoupling, there are numerous similar news reports
Between October 2018 and 2019, Samsung successively closed its factories in Shenzhen, Tianjin, and the only remaining one in Huizhou;
Google publicly stated in August 2019 that due to high production costs in China, it would transfer its pixel smartphone production line to Vietnam in the future;
Microsoft also plans to transfer its production line from China to Vietnam. Starting from the second quarter of this year, Microsoft plans to produce Surface Pro and Surface Go, including the Go platter, in Vietnam.
Since production has decreased, the demand for service trade has naturally shrunk, and the demand for office buildings has correspondingly decreased.
Thirdly, there is an excessive supply of office buildings. Due to long-term low interest rates and high M2 growth, a large amount of hot money has flowed into first tier cities. In the past, when residential land was controlled, building office buildings was a good idea.
According to the “2020 China Real Estate Market Outlook” released by CBRE, the newly delivered area of office buildings in China in 2019 was approximately 7.4 million square meters, a historically high value. In 2020, the new supply of office buildings in China will reach a new high, reaching around 7.5 million square meters.
And what about the newly added absorption? In 2019, there were only over 3 million square meters, which means demand was less than half of supply. In the situation of severe oversupply, it is not surprising that the vacancy rate of office buildings continues to rise.
The “Skyscraper Index” proposed by Thornton integrates the theory of another economist, Lucas Engelhard, and believes that the key is to observe whether the CBD of first tier cities is actively building skyscrapers.
Due to low interest rates, high-income earners and hot money tend to gather in the CBD of first tier cities for various reasons, leading to a surge in land prices and the need to build higher floors. Since money is easy to borrow, even if it is not in a first tier city but in a remote area, one must work hard to build it:
For low – and middle-income groups, the impact in this regard is the opposite, also known as the “Cantillon effect” – under high inflation conditions, “first come, first served”, whoever seizes the newly issued currency first will take the lead, and those who enter later will have to face the fate of being cut off. After the last round of cutting off the leeks, the crisis will come.