Tokyo’s office construction boom and it’s repercussions

JP Tower in Marunouchi

The construction of new office buildings in central Tokyo is steadily progressing. In January, Mitsubishi Jisho’s Marunouchi Eiraku Building was completed. In Spring, JP Tower and the Palace Building were completed, and Otemachi Financial City will be completed in fall.

According to the Urban Research Institute Corporation, the total supply of commercial office space in 2012 will reach 2,680,000 sqm (28,836,800 sqft). This is close to the past decade’s peak of 2,980,000 sqm in 2003. A quarter of the office supply is located in the Marunouchi area on the western side of Tokyo Station.

Despite the current economy, demand for brand new office space is strong. In addition to the growing demand for buildings with extra earthquake-resistance and safety features, corporations are seeking entire office floors as they consolidate their operations and operate out of one office.

— Fall in rent —

As tenants begin to move into new office space, vacancy rates in older buildings are expected to increase. Vacancy rates in central Tokyo are hovering around 7%, and the downward trend in office rent is continuing.

Between 2006 and 2008 the Japanese economy was bullish, and demand for office space was strong as companies expanded. There was a smaller supply of new office space. Many older buildings were demolished after the last tenant moved out which would reduce the vacant office space across the city.

The Lehman Shock caused a complete change in the office market. As tenants began looking for cheaper office space, building owners offered their existing tenants steep discounts on rent in order to persuade them to stay. Vacant office space, new and old, began to rise.

If the current construction boom oversupplies the market, there is a chance it may hasten the worsening economic conditions.

— Small to medium building owners in Shinbashi suffering strong competition —

The area around Tokyo Station is considered the best commercial district in Japan. However, owners of small to medium sized buildings in Shinbashi, which is just on the edge of this district, are facing stiff competition. In some cases, even reducing the rent to as low as 10,000 Yen/Tsubo (3030 Yen/sqm) is not enough to attract tenants. Many years ago 10,000 Yen/Tsubo would only get you office space in a building without elevators.

Along with a drop in demand, small to medium building owners are facing tough competition from major real estate developers. These developers are able to offer similarly small to medium sized office space through the use of partition walls. Not only are they offering the same sized offices at similar rental prices, their newer buildings provide better facilities.

While poor economic conditions continue, large real estate developers are focusing their attention on redevelopments and improving operating ratios in the top districts only. This means that there are less acquisitions and reconstruction projects in the fringe areas, which is leading to a bipolarization between prime and fringe locations.

Many real estate experts believe that the office market will bottom out from the second half of 2012. However, these opinions only apply to the market in Tokyo’s prime commercial areas. More new office buildings are expected to be completed in 2013. If demand continues to decline, there may be a risk of oversupply next year.

Source: Toyo Keizai, February 24, 2012.

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