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Game On:
Olympics push Beijing to expand

In just a few weeks, Beijing will open its doors to visitors from across the globe when China hosts the 2008 Olympic Games. The city, which is China's capital, has undergone a dramatic transformation in the two-year period building up to the Olympic Games.


From infrastructure improvements and sustainability initiatives to newly constructed Olympics-related venues and new supply of commercial and residential development, Beijing that will be showcased in August is vastly different from the old Beijing.

However, it's somewhat inaccurate to attribute Beijing's growth and transformation solely to the Olympic Games. "The Olympic Games acted as a catalyst for the redevelopment of Beijing, but the changes would have occurred with or without the Olympics because of the economic growth the country has experienced," says David Hand, an international director in Jones Lang LaSalle's Beijing office.

A quick transformation
Despite having a population of nearly 18 million people, Beijing has always been overshadowed by Shanghai, which went through a huge development boom in the 1990s and received large amounts of foreign investment. While Shanghai developed into a sophisticated city with a place on the international stage, Beijing never really received much interest from foreign investors and missed out on the development boom.

In fact, Beijing has long suffered from a shortage of high-quality office and retail space. Prior to 2007, occupancy levels in the city's top buildings, such as China World Trade Centre, had not dipped below 90 percent for years, forcing large space users to adjust their Beijing expansion plans due to a lack of suitable space.

Similarly, international retailers that were eager to expand into new areas of Beijing couldn't find suitable space outside of Beijing's established shopping centers. And, despite its long-time history as a destination for business and leisure travelers, the city didn't have many five-star hotels.

But the Olympics gave the Chinese government an impetus for investing in Beijing and accelerated the city's redevelopment. "China wanted to present Beijing as a modern, sophisticated marketplace," Hand explains, adding that the Chinese government has gone out of its way to cooperate with developers and has encouraged developers to finish projects in advance of the Games.

Since Beijing won the Olympic Games bid in 2001, GDP has grown at an impressive average of 14.5 percent per year. And, the city's Olympics-related construction boom has also coincided with the relocation of an estimated 1.5 million people from dense urban areas to new suburban centers, according to a report from Jones Lang LaSalle.

Welcoming new design
A total investment of approximately $41 billion was budgeted for Beijing's transformation leading up to the Olympic Games. Much of that investment has focused on the expansion of Beijing's subway system and the development of Olympics-related venues.

The expanded subway system is expected to address air quality issues - something that Beijing has struggled to get its arms around. The subway system will grow from four lines to eight lines by August 2008 and will increase total track length from 113.35 kilometers to 197.16 kilometers, creating 53 new stations.

In addition to the subway expansion, Beijing has successfully completed 37 Olympics-related venues including the Grand Theatre and National Stadium, known locally as the Bird's Nest. These high-profile projects, along with others, have been designed by famous architects, and through these projects the Chinese government has sent a message to the world that it is open to new design and construction approaches, according to Scott Kilbourn, a head designer in RTKL's Shanghai office.

"China is genuinely interested in learning from the rest of the world and wants to tap into the best of the best around the world," says Kilbourn, whose firm has worked on about 30 projects in the Beijing area over the past five years including the Chinese Museum of Film. "The Olympics have helped China break down the wall to encourage investment in Beijing."

And, although the vast majority of development in Beijing is spearheaded by Chinese developers, many international investors have come into the city, partnering with Chinese companies and bringing capital and expertise.

Chicago-based Urban Retail Properties, for example, recently partnered with Shanghai-based Long Run Investments to create Long Run Urban LLC. The newly created company is looking to develop mixed-use projects in both Shanghai and Beijing, according to Ross Glickman, CEO of Urban Retail Properties.

"China is a newer market for us, but we're very bullish on the country," Glickman says. "We think the Olympics have brought a lot of positives to the Beijing marketplace in terms of Western development firms and investment banks."

Unprecedented expansion
Today, Beijing's property market is undergoing an expansion of unprecedented proportions. Since late 2006, the office, retail, and residential markets have expanded by 52 percent, 89 percent and 58 percent, respectively, according to Jones Lang LaSalle.

Approximately 2.8 million square meters of new class A and Grade B space has either come online or is under construction in Beijing - and the new buildings are of a much higher quality than what previously existed in Beijing. Demand for new space has exceeded expectations with record levels of absorption in 2007, Hand notes. This strong demand, combined with the increasing quality of new developments, pushed rental growth up 16 percent in 2007.

However, the new supply is expected to push Beijing's overall office market vacancy to 19.5 percent by end of 2008. The good news it that the city will have a fair amount of time to absorb the new supply since development is tapering off and less new supply is expected for 2010 and 2011. The lasting legacy of the current supply boom will be an overall upgrade in the quality of the Beijing office market.

Similarly, Beijing's retail market has added millions of square meters of new space over the past two years. In 2007, four new shopping centers were completed, and this year, 11 more projects are expected to open. In total, Beijing has seen its retail inventory increase by nearly 2 million square meters.

Pre-leasing for this new retail space has been extremely strong as retailers hope to take advantage of the 500,000 international visitors that will descend on Beijing during the Olympics. Aside from international visitors, retailers are also interested in the strong demand from domestic consumers.

Beyond office and retail, Beijing's hotel market has also bulked up in advance of the Olympics and several new operators have entered or expanded in the city including Ritz Carlton and Westin. More than 12,400 rooms have been added to the market or are under construction. This represents a substantial increase over previous levels and is driven not only by the awareness that there will be dramatically higher demand for quality hotels during the Olympic Games, but also by the expectation that long term demand for four and five star hotels in Beijing will be strong.

Despite all the new supply, experts expect on a short period of contraction and adjustment in Beijing's property markets after the Olympics. "Beijing is going to continue to grow after the Olympics, and there's no reason to think that companies will be less interested in expanding in Beijing just because the Olympics are over," says Beverly Sunn, president of Asia Pacific Properties, a commercial and residential brokerage firm that helps companies establish offices in China.

Sunn says the long term legacy of the Olympic Games on Beijing will be positive: the city will be cleaner, greener and more cosmopolitan than before, making it a more attractive location to do business and a much more livable city.

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