Oversupply is a perennial question in China retail. Rather than a national issue, it is typically a city or even district-level phenomenon. As we recently expanded our coverage to more Tier 3 markets, we have found an instructive new example of oversupply in Changzhou, a representative Tier 3 city.

While at first glance just another prosperous city in the Yangtze River Delta alongside Wuxi and Suzhou, Changzhou has among the highest overall retail vacancy of any market we track. In contrast with Shenyang’s overabundance of enclosed, climate-controlled malls, Changzhou’s retail market sags under the weight of a dozen or more strata-titled, open-air shopping centres. Relatively inexpensive to build and popular among local developers, the format only has one truly successful example: the South Street pedestrian street in the city centre. It is the oldest and best-located of the bunch, anchoring the city’s bustling downtown shopping cluster and sitting between two of Changzhou’s busiest department stores.

Many later projects were attempts to duplicate South Street’s success, but they lie in less mature retail submarkets or lack South Street’s cluster effect, reducing their catchments and limiting foot traffic. The result is a miasma of nearly deserted shopping centres lining some of Changzhou’s busiest avenues. Many projects suffer 40% or higher vacancy even two years after completion, and even numerous street-facing shops remain empty. Several projects exceed 100,000 sqm and are oversized for their community-mall orientation, especially given the city’s reputation for low occupancy in new residential areas. Poor maintenance and degradation from exposure to the elements are common, with cracked floors and rotting, leaky roofs. We have taken to referring to these shopping centres as “beached whales”: huge, dead, and not going anywhere.

The outlook for these assets is not rosy. E-commerce is hollowing out the base of non-branded clothing sellers that used to be these properties’ core tenant group. In addition, Changzhou is seeing an influx of superior-quality, wholly-owned enclosed malls from the likes of Wanda Group and local developer Future Holdings (behind the InJoy brand of malls). Featuring more comfortable shopping environments, better management, and housing a plethora of national brands and anchor stores, these heavily-trafficked malls are capturing the momentum in Changzhou’s growing retail market. As residential occupancy rises, shoppers will continue gravitating toward better shopping destinations like these. Many more such malls are planned over the next five years. This makes the possibility of struggling open-air shopping centres staging a comeback even more remote, and they will face permanent obsolescence.

Changzhou’s glut of strata-titled shopping centres is an extreme example of how retail oversupply manifests in China’s Tier 3 cities, in which-cheaply built, low-end retail properties are getting left behind as the market evolves. We expect that in the future these buildings will drop out of the retail market entirely as landlords or tenants find ways to creatively adapt poorly-positioned but well-located spaces for new purposes – possibilities include small offices, educational and training facilities, and even neighbourhood-level e-commerce picking & packing distribution centres, including for mom-and-pop Taobao operations.

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