As Japan basks in new found confidence, boosted by ‘Abenomics’ and the buzz around Tokyo’s preparations for the 2020 Olympics, plans to build the country’s tallest tower are in full flow.
The new skyscraper from Mitsubishi Estate will feature 61 stories above ground and five stories below ground to reach 390 meters in height – surpassing the 300-meter Abeno Harukas skyscraper in Osaka, western Japan. The project, which will include two other structures, will cost ¥ 1 trillion ($8.3 billion) and be built on 3.1 hectares of land, the largest plot in the vicinity of Tokyo Station.
Located in the heart of the city’s financial hub and surrounded by Tokyo’s priciest real estate, the project is set to be finished by March of 2028. It will have commercial facilities and office space, and a 7,000 square-meter plaza in the complex to host big events according to Mitsubishi Estate, one of the largest and oldest landlords in the area.
“We’ve seen renewed interest in the Marunouchi /Otemachi submarkets in the last few years, especially from corporate occupiers and tenants in the financial sector,” says Neil Hitchen, Head of Markets at JLL in Japan. “The launch of the Tokiwabashi District Redevelopment Project will provide further impetus to this trend.” Marunouchi is a commercial district of Tokyo located in Chiyoda between Tokyo Station and the Imperial Palace.
A global financial center
Mitsubishi Estate’s President Hirotaka Sugiyama says he hopes the new development will improve the city’s standing as a global financial center, while attracting a wide range of professionals in other industries.
Corporate profits in Japan rose to a record high in the financial year ended March 31. Coupled with strengthening economic indicators, this has helped to fuel domestic demand for office space.
Real estate capital values in Tokyo jumped 20.6 percent in the second quarter, compared with the year earlier period while rental rates registered a 5 percent growth, according to JLL’s latest Asia Pacific Property Digest report.
Capital values have generally accelerated strongly in Japan across all real estate sectors since the introduction of Abenomics. Tokyo office values are up about 41 percent for Grade A and 51 percent for Grade B from the end of 2012 to June 2015. The most active leasing sectors included have information and communications, manufacturing and professional services.
Too many office buildings?
However, questions have been raised about the prospects of the real estate market after the Olympics and whether Tokyo actually needs more office space.
“With a construction period spanning 10 years, we won’t see first deliveries (from the Tokiwabashi District Redevelopment Project) until 2021 at the very earliest. Given the Grade A office oversupply in 2018 and 2019, a development of this scale could face occupancy challenges, particularly if Tokyo is suffering from a post-Olympics hangover,” says Hitchen.
A few other projects are scheduled to be completed in the near term. The Hamamatsucho Station Project with a gross floor area (GFA) of 100,000 square meters, is due in 2018 and the Yaesu 2-chome North District Development (GFA 294,000 square meters) is expected to be completed in 2021.
“Real estate markets are cyclical in nature and therefore we expect periodic ups and downs,” says John Howald, JLL’s Director of Capital Markets based in Tokyo. “The Olympics and Paralympic Games are a multi-week event which does not have a significant, long-term impact on supply and demand for commercial real estate in a developed market the size of Tokyo.”
The world’s most populous city
The city’s global competitive position is fundamentally tied to its unique economic scale as the world’s most populous city, with the largest urban economy and consumer market. The GDP of Greater Tokyo exceeds US$1.4 trillion (as large as the economy of Spain) and, with nearly 38 million consumers, its domestic market far exceeds even that of New York, London and Paris, based on data compiled by JLL’s Cities Research Centre in the report Tokyo on the World Stage. The city region is home to more than Forbes Global 2000 headquarters than any other city.
In the near term, a low interest environment should continue to support the real estate market. The vacancy rate is expected to remain low, reflecting steady demand amid a supply pipeline in line with the past ten-year annual average.
Yasuo Kono, Japan strategist at LaSalle Investment Management, tells the Wall Street Journal that the recovery in the office property market is accelerating, leading to more development projects, but this is unlikely to last until 2020.
Still, projects such as the one announced by Mitsubishi Estate fit well with the long-term redevelopment theme for Tokyo – tall, multi-purpose buildings at the city center, and such investments should perform relatively well, he said.
“Projections beyond the 2020 Tokyo Olympics would be highly speculative, however, we can say with certainty that Tokyo will remain one of the largest and most important commercial real estate markets in the world — well beyond the 2020 Olympics,” says Howald.