Tokyo prepares for an Olympic-sized office boom

 —  Article by Shilpa Pai Mizar
business people crossing street in Tokyo
Image credit: Shutterstock

When the fireworks light up the sky above Tokyo for the opening of the 2020 Olympics, its skyline could look rather different to today.

As many as 45 new skyscrapers could have been built by then as the city’s leading business areas such as Chiyoda, Minato and Shibuya see a flurry of construction activity.

And the majority could be ready to welcome occupants in the next three years, as Tokyo adds around 50 percent more new space in the three years to 2020 than it has in the previous three years.

Behind the boom time

While Prime Minister Shinzo Abe’s economic policies and Japan’s ultra-low interest rates are the two key reasons driving the current skyscraper boom in Tokyo’s central business areas, there a few other factors at play, observes Yuto Ohigashi, Associate Director at JLL Japan.

Central business districts in many cities tend to be tight on supply, but Tokyo faces additional constraint on availability of top-quality office space due to the region’s susceptibility to earthquakes. So far, this has meant that the city has had to restrict the height of skyscrapers when compared to other global hubs, thereby limiting creation of new space in the CBD.

But with latest improvements in quake-resistant technology, buildings in Tokyo can now tower over 300 metres and most of the new skyscrapers are redevelopments as “there is a motivation for developers to build larger buildings within the same site with certain restrictions and regulations,” Ohigashi says. Furthermore, developers are now seeing an advantage to complete these projects in time for the 2020 Olympics, as this will give the properties significantly greater exposure, he adds. The Marunouchi and Otemachi areas of Tokyo’s CBD are popular among domestic companies for their headquarters. Meanwhile, the Roppongi and Akasaka areas are home to the headquarters of multinationals and Shibuya holds sway with IT firms.

These patterns of occupancy are expected to continue, says Ohigashi, with former tenants coming back after redevelopment. “Office buildings in lesser known and fringe areas of the city may find themselves dealing with increasing vacancy rates as tenants move out to take up newly created space at the prestigious CBD addresses,” he continues.

Balancing supply and demand

While there is a healthy level of tenant interest, developers and investors in Tokyo’s CBD should not assume that they are assured of filling up the space. “This huge supply amount is expected to cause a certain amount of vacant space,” says Ohigashi. “This is particularly true of the projects concentrated in the Minato-ward bay area, such as the Tamachi, Hamamatsucho and Takeshiba areas where the developments are built on vacant land.”

In the first quarter of 2017, the vacancy rate rose to 2.7 percent, up from 1.9 percent the previous quarter.

Compounding the situation are behind-the-scenes causes which can lead to lower occupancy. For instance, it is not uncommon for large companies who are favoured long-term tenants to invest in their own real estate. Also, the Minato bay area may face difficulties in attracting tenants due to competition from the new office space in nearby Toranomon, according to Ohigashi.

“Landlords will have to develop timely, well thought-out strategies to address the situation,” he says.

How the glut in supply is not expected to have a long-term negative impact on rents. Tokyo currently ranks fifth for rents for premium office space around the world according to JLL’s premium office rent tracker. As Japan’s mature economy continues to show resilience, an office in one of Tokyo’s important business districts remains a sought-after address; Grade A office rents have seen twenty consecutive quarters of growth.

“The average Grade A office rent in Tokyo that is now US$110 per sqft can be expected to go down in the short-term to attract tenants,” says Ohigashi. “However, we expect the rental decline to be very limited and of a temporary nature that will be followed by a recovery.”

While the city’s skyline may be changing rapidly, its business as usual for its office market.

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