The Journal The Authority on Global Business in Japan

REAL ESTATE | OFFICE LEASING

SEPTEMBER 2014

Vying for Space

Tokyo’s vacancy rates plummet while rents soar

The market for office space in Tokyo is booming, in part due to optimism surrounding Prime Minister Shinzo Abe’s pledges to boost the national economy.

A steady increase in demand has been seen over the past five years, following the so-called Lehman shock, with only a minor dip following the triple disaster in March 2011.

Both domestic and international companies are driving this demand, and they are looking for offices of all sizes.

“The predominant reasons companies are relocating are positive ones. They are expanding, looking for better locations with more office space, and hiring more employees,” said Toshihiro Mochizuki, of Mitsui Fudosan, Co., Ltd.

Indeed, many companies are not only seeking additional space for current headcount, but are also planning ahead for future hires.

Before, Mochizuki added, companies were relocating because they had to downsize, so the market has done a complete 180-degree turn.

Grade A properties are particularly in demand. These buildings must meet certain criteria, such as being located in one of Tokyo’s five central wards—Chiyoda, Chuo, Minato, Shinjuku, or Shibuya—and have floor space of 10,000 tsubo (33,058m2) or more.

They must also be no more than 15 years old. The vacancy rates in these properties are at their lowest in three years, and this is causing upward pressure on rents.

According to research by Savills, achievable rents for Grade A office space rose 2.8 percent in the second quarter of 2014, which signifies a robust rate of increase in this market.

Furthermore, very few new large-scale developments have come on the market in the 2013–14 period, creating a noticeable squeeze for top-tier properties.

In 2013, for the first time in six years, the new aggregate demand for offices in Tokyo’s large-scale buildings surpassed the new aggregate supply.

Competition can be fierce for office space these days, and it is likely to worsen in the next year or so.

A voice for tenants
This is where tenant representation comes in, to help match companies with suitable buildings. Greg Turnbull works for a large property consultancy, but he represents leaseholders, not landlords.

“We sit clearly on the occupier’s/user’s side, as opposed to the landlord’s side,” said Turnbull, who is a senior tenant representative at Colliers International in Japan.

In practice, this means that Turnbull and his colleagues, rather than talk up the market, spend a lot of their time, as he put it, “refuting market rumors and landlord ambition.”

“In 2014, the Tokyo office market has tightened considerably in comparison to recent years, as firms have relocated, decreasing overall market vacancy. Demand remains price-sensitive, so top rents have remained relatively static,” he said.

Mitsui Fudosan’s Mochizuki agreed. “There is a steadily growing demand for top-class buildings. In these buildings, the rent is high, but they are still fully occupied.”

As of the second quarter of 2014, the average rent in Tokyo’s five central wards was ¥16,325 per tsubo.

However, with an expanding economy comes more buildings, so there is hope yet for companies bemoaning current Tokyo rates and availability.

“The amount of new office stock being added to the market will increase year on year, peaking in 2017,” Turnbull noted.

“Navigating the currently tight conditions, while planning to leverage upcoming supply, requires careful advice and consideration.”

Since the end of last year, some landlords have begun attempting to increase rents for existing premises at lease renewal or expiry. However, with the exception of those leases with very low rent, any level of increase should be vigorously challenged, he said.

In addition, Turnbull said some practices may come as a surprise for newcomers to this market, as traditional Japanese leases have many tenant-friendly features.

This includes allowing tenants to terminate space with six months’ notice, and also allowing tenants to re-negotiate their rents at any time.

Bigger not always better
Not all companies require offices in a city’s most prestigious Grade A buildings or prime commercial areas. For many organizations, mid-size offices with supreme attention to detail are more attractive.

This is particularly true for the growing number of small, independent businesses in Japan, a sector of the economy Prime Minister Abe is trying to enhance.

Nomura Real Estate Development sees a niche market emerging for what it deems to be PMOs (premium mid-size offices): companies with 10 to 40 staff.

The firm coined the term in 2008 in response to what it interpreted as a new type of demand outside the Class A structures. Security, economy, and lifestyle elements are priority concerns for such clients.

Japan is known worldwide for the safety of its buildings. Nevertheless, “security remains very important to clients, as it increases the credibility [of a property],” said Emii Kojima, who works on the leasing team at Nomura.

In addition to advanced security features, the company’s PMO facilities are equipped with double-pane windows, which allow in natural light, but screen out harmful ultraviolet and infrared rays, another prime selling point.

Many prospective tenants also place a high value on eco-friendly features such as LED lighting and rooftop greenery. “Energy efficiency is one of the most appealing elements,” Kojima explained.

Just like Tokyo’s Grade A buildings, however, Nomura’s 16 PMOs have nearly 100% occupancy. The company plans to open a 17th facility this month (September 2014), in Shibadaimon, Tokyo. This is another area of town that has been getting a lot of attention of late, as companies take notice of larger spaces available in recently built structures in the Shibaura area near Tokyo Bay.

Among Tokyo’s five central districts, Shinjuku posted the strongest rental growth in the second quarter of 2014, spurred on by a fall in vacancy rates.