The Journal The Authority on Global Business in Japan

Defying predictions, Japan’s economy grew at an annualized rate of 2.1 percent in the January–March quarter, up from an expansion of 1.6 percent in the previous quarter. The rise underlines both the strength and potential of the nation’s economy, and makes it clearer to many foreign companies—large and small—that a physical presence in Japan is critical.

The need to be here has translated into growing demand for office space. The vacancy rate for large office buildings in Tokyo’s 23 wards sank to 1.9 percent in late 2018, the first time it had fallen into the one-percent range in 18 years.

WeWork Ginza Six. Photo: WeWork

Changes in how multinationals, small and medium-sized enterprises (SMEs), startups, and entrepreneurs go about their business is also affecting the office-space sector. New technologies and approaches to businesses are transforming the ways in which employees work. Telecommuting, hot-desking, and shared workspaces were rare—even unheard of—a decade ago, particularly among some of Japan’s more traditional companies. But there has been a gradual realization that a shrinking population means that companies must provide optimum working conditions if they want to retain their best people.

“Ongoing global urbanization has seen more than 50 percent of the world’s population locate in urban areas,” said Shinji Takeda, senior manager of the Office Business Department of Mori Building Co., Ltd. “By 2050, that figure is expected to exceed 66 percent.

Kaleido Works. Photo: Mori Building Co., Ltd.

“When launching a business, it is natural to locate in a city that attracts large numbers of people and corporations. For such cities, magnetism is crucial,” he told The ACCJ Journal. According to the Mori Memorial Foundation’s latest Global Power City Index—an annual study of the strengths and weaknesses of the world’s best-known cities—Tokyo ranks third in the world in overall magnetism, and second in both nominal gross domestic product and stock market capitalization.

According to the Mori survey, 45 percent of companies expect to increase employee numbers in the coming year, which is helping to drive demand for office space. To meet that surging demand, a number of large-scale office properties are scheduled to open in Tokyo in 2020, with a second wave due to hit the market in 2023. In addition, the average floor space of each property is trending upward, with the number of office buildings topping 100,000 square meters expected to be the greatest since Mori first began its annual survey in 1986. Tokyo’s office buildings are becoming larger.

Pembroke Vice President and Head of Japan Gordon Hatton, who is also co-chair of the American Chamber of Commerce in Japan Real Estate Committee, agrees that the number of Fortune 500 companies with a presence in Tokyo—and Japan’s position as the world’s third-largest economy—make the city an important place for companies to be. This is helped by the “stability and sophistication of the market,” he said.

“There has already been a significant amount of office space added in the city in the past few years, and there is more to come. But, still, we see office vacancy rates continuing to compress.”

Kaleido Works. Photo: Mori Building Co., Ltd.

Since 2011 and the Great East Japan Earthquake and Tsunami, the sector has seen companies renting everything from Class A to Class S office space attempting to up­­grade their facilities by moving into properties that are more resistant to natural disasters as well as being more comfortable, Hatton said. This has led to smaller and older buildings being demo­lished and new stock coming on the market.

The Otemachi and Marunouchi areas have seen a significant amount of new development in recent years, helped in large part by their proximity to Tokyo Station. Meanwhile, the Roppongi, Shinbashi, and Toranomon districts are becoming more competitive as a result of a number of large-scale projects, while Shibuya and Shinjuku are consistently evolving. Shinagawa is already benefiting from its proximity to Haneda International Airport, and is likely to experience another boost when the maglev train between Tokyo and Nagoya goes into operation in 2027.

Pembroke Real Estate operates an office property in Tokyo’s Roppongi district that is home to more than a dozen companies. Both domestic and foreign players in a range of industries have made Tri-Seven Roppongi their Japan base of operations, with the tech and creative sectors topping the list.

“Location is always important in Japan, because not many employees will change their residential location for their job. This means that companies have to take into account where they are going to base themselves,” said Hatton, who reiterated the importance of keeping the best employees happy with their working arrangements.

Price is a factor in any decision to move into a new office space, Hatton said, but occupants are increasingly seeking out uniquely designed buildings that will reflect their brand identity and facilitate a creative work environment.

These spaces may include features that make life that much more comfortable. Showers, flexible working spaces, a coffee shop in the same building, shared open spaces that are away from the office, and a concierge service are perks that can potentially serve as the difference when a company is choosing from two or more properties.

In one building in Seattle, for example, employees are encouraged to bring their dogs to work, and there are said to be 1,000 canine occupants of the property on top of the human employees. It may be some time before Japan matches that level of pet-friendliness, but Hatton says change is coming and that building operators need to be innovative in what they provide.

According to Mori Building’s research, demand for efficient and cheap property space is in decline as companies invest more in their working environment and demand co-working areas, remote spaces, and scalable offices for future growth.

One of the giants of Japan’s office sector, Mori Building rents out about 50 buildings with a total of 760,000 square meters—primarily in central Tokyo’s Minato Ward. The largest single property is Roppongi Hills Mori Tower, which is the workplace of an estimated 15,000 people.

Technology has hastened changes in how people work. A new generation of entrepreneurs and employees is seeking a flexible work environment and user-friendly spaces, and a number of relatively new companies are looking to leverage this need.

“The government here has been pushing energy-efficient, smart-city initiatives, while also pursuing its dream of a ‘new Silicon Valley’ ecosystem that boosts innovation, can lead to the discovery of new tech champions, and can trigger the rebirth of Japan as a technologically advanced nation—something that is currently being challenged by China, South Korea, and Singapore,” said Samir Bennafla, head of new business development for Bouygues Asia, which set up the Place2B workspace and partnership accelerator in Tokyo.

Bennafla sees the Japanese capital as “an excellent play­ground for business experimentation and scalability,” although companies have, until recently, been required to buy into the traditional office-rental model.

“This system is really demanding. It requires companies to make a significant financial investment and to abide by strict conditions,” he said. “Nowadays, shared offices and co-working spaces are gaining a lot of traction, because they help people use the space as a service rather than being required to be an owner with responsibility for management of the space.

“We also understand that, for small foreign companies, Tokyo can be an expensive and overwhelming place to start, so we are trying to be competitive on price and flexible to help our member companies kick start and grow their business without being overwhelmed.”

For startups looking for a place to hang their hats, Bennafla ticks the priorities off the fingers of one hand:

Opportunity includes finding the right place to meet with partners and potential investors, and vibe is an intangible quality that makes a place feel right for the business.

Photo: Pembroke

Arguably the best-known name in the shared workspace area is WeWork Companies Inc. The Japan unit of the company that was founded in New York in 2010 now has 17 properties across the country. Its latest location, with a remarkable 2,900 desks across 20 floors of an entire building in Osaka, will open in June.

Kumiko Hidaka, vice president of public affairs at WeWork Japan, says that, as a membership business, the secret to WeWork’s success is less about offering a place to work and more about providing the opportunity to connect, get inspired, and collaborate within a thriving community.

“By 2020, half of the world’s working population is going to be made up of Millennials at the same time urbanization increases,” she said. “The trend holds true in Japan, as we are seeing people gravitate towards the cities and there needs to be a variety of workplace opportunities to meet their requirements.

“People want to make connections, they want to build and be part of active communities that make it easier for them to communicate,” she said. “In the past, people made an appointment to go to an office and talk to someone. Now, WeWork members are part of a 400,000-strong global co­mmunity, and they can go into any one of our locations across 105 cities, including Shanghai, London, Mumbai, and New York, and immediately tap into the local community.”

For Hidaka, diversity and dynamism—in career paths, workstyles, and workspaces—will sooner or later become commonplace in the way we work. “Like never before, people value options in their work and they want something that suits them personally, at any given moment,” she said. “It works for the company as well. If companies can give them that, then they are more satisfied and motivated, and their productivity is better. Where is the downside?”

Artist rendering of the Innovation Center at Toranomon Hills Business Tower. Photo: Mori Building Co., Ltd.

Julian Ryall is Japan correspondent for The Daily Telegraph.
For small foreign companies, Tokyo can be an expensive and overwhelming place to start.