The Renaissance of
Tokyo City
Research | December 2016
Executive Summary
An Analysis of the Current Office
Leasing Market and the Impact of
Record Supply 2016-2020
Under current sluggish office rent growth,
the record level supply has been
major concern in the market.
Reasons for Sluggish Office Rent Growth
Rising office stock and
increasing tenants’
choice
As premium grade
offices age,
rent prices converge
More efficient use
of work spaces
ects of
Expected eff
Elevate the
vacancy rate in
the short term
Limited corporate
expansions
ly
Future Supp
Increase city
competitiveness of
Tokyo in long term
Put downward
pressure on the
Tokyo office rent
in middle term
Tokyo expected to experience
a new renaissance despite
aging population.
2 JLL
Contents
Introduction 4
1. JLL Forecast
4
2. Recent rental growth is slower than expectation
5
3. Reasons for slow rental growth 6
4. Looking forward - office supply from 2016
9
5. How record supply will be absorbed 11
6. Impact on rent and capital markets
15
Conclusion 15
Introduction
The Tokyo office market has undergone a number of major periods
of rebuilding and refurbishment since the end of World War II and
we believe that Tokyo may be entering a new renaissance era over
the coming years. The office market experienced a rebuilding phase
after the war and again before the 1964 Olympic Games. The office
market also saw a significant expansion during the bubble era of the
late 1980s. Tokyo will host the 2020 Olympic Games and we will see
a significant level of new office supply in the run up to the games and
beyond.
Grade A and Grade B office completions are expected to exceed
3 million sqm over the next five years and there are a number of
significant new projects in the pipeline in the period from 2020 to 2030.
This new development bubble will undoubtedly improve the quality
of the Tokyo office market and will make it more competitive with
regional and global cities. However, there are a number of concerns
as to whether the Tokyo market can absorb new supply of this scale
and nature, given the underlying macroeconomic and demographic
challenges facing Japan.
Japan’s population continues to shrink although, interestingly, the
number of people moving into Tokyo is rising. This, combined with a
projected rise in the number of female and senior office workers under
“Abenomics”, should help to boost the working population in Tokyo,
which will support, in turn, the demand for office space. This new
supply is expected to spur transactional activity as new products are
introduced into the marketplace.
Given the expansion of the working population in Tokyo and the
subsequent increase in the total space occupied over the last eight
years since the global financial crisis (GFC), we would have expected
much more robust rental growth. However, an interesting feature of
the Tokyo office market over recent years has been the rather modest
rent increases, despite very low vacancy rates in all major submarkets.
In this report, we analyse the market dynamics and drivers that will
help meet the challenges posed by the significant expansion of the
office stock on the horizon and that will help drive value for both
occupiers and investors and, hopefully, breathe renewed life into this
global city.
1. JLL forecast
Figure 1: Tokyo Grade A and B rent / vacancy rate
Rent (JPY/tsubo/month)
40,000
※1
JLL Office Definition
Tokyo Grade A
Location
Tokyo Grade B
CBD 5-kus (Chiyoda, Chuo, Minato, Shinjuku, Shibuya)
Gross Floor Area
30,000 sq m +
5,000 sq m +
Floor Plate
1,000 sq m +
300 sq m +
Building Storey
20 floors +
8 floors +
Completion Year
1990 and later
1982 and later
4 JLL
9.0%
38,000
36,000
“By 2019, we forecast that
Tokyo’s Grade A and B office
rental rates will start to fall as a
result of increased completions.”
Vacancy rate
10.0%
34,000
32,000
+1.2%
+2.3% -0.1%
+3.2%
-0.4%
8.0%
7.0%
6.0%
30,000
5.0%
28,000
4.0%
26,000
3.0%
24,000
2.0%
22,000
1.0%
20,000
0.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
JLL predicts that the current rental cycle will peak in 2018. By 2019,
we forecast that Tokyo’s Grade A and B1 office rental rates will start
to fall as a result of increased completions. However the magnitude
of this decline will be much milder (-0.1% to -0.4%) compared to the
period following the GFC.
Rent
(Grade
A & B)ServiceVacancy
Source: Real
Estate
Intelligence
(REIS), JLL
rate (Grade A & B)
2. Recent rental growth is slower than expectation
The Tokyo Grade A office market has been in a rising cycle since
2012. The current low vacancy rate at around 2% is similar to levels
during the previous recovery cycle leading up to the GFC in 2008,
however rent growth is lower in the current cycle.
For example, in 2006, the vacancy rate was 1.7% for Grades A and B
office space and rental growth was 19%. In the third quarter of 2016,
the vacancy rate was also 1.7% but rents only registered a 4% yearon-year growth, defying market expectations.
The Renaissance of Tokyo CIty 5
3. Reasons for slow rental growth
Many factors contributed to the slower rate of rent price increase in
recent months. Among them was the slower GDP growth, along with
the continuing impact of the GFC as well as increased regulation
particularly in the banking sector. These affected demand. On the
supply side, large office buildings continued to be built in the city
centre. The total Grade A office stock in the 5 wards in central Tokyo
doubled in the past 10 years.
office stock and increased
a. Rising
tenants’ choice
The total stock of Tokyo Grade A and B office space has grown to
16 million square meters; 1.4 times the space that was available a
decade ago. While the vacancy rate in 3Q 2016 is the same as levels
10 years ago, the total vacant area itself has risen from 190,000
square meters to 280,000 square meters. There is a clear correlation
between low overall vacant space and the dramatic rent price increase
seen in 2006 and 2007.
One explanation for the lower than expected rental growth in this
current cycle is that potential tenants have significantly more choice
among the higher-quality buildings. Meanwhile owners find it
increasingly difficult to differentiate their buildings from others, which
inhibits their ability to charge premium-level rents.
“The total stock of Tokyo Grade
A and B office space has grown
to 16 million square meters;
1.4 times the space that was
available a decade ago.”
Figure 2: Tokyo Grade A and B office vacant space and rent growth y-o-y
Vacant space (sqm/k)
1,200
Rent Growth Y-o-Y
25.0%
20.0%
1,000
15.0%
10.0%
800
5.0%
0.0%
600
-5.0%
400
-10.0%
-15.0%
200
-20.0%
-25.0%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
0
Vacant Space
Rent Growth Y-o-Y
Source: Real Estate Intelligence Service (REIS), JLL
6 JLL
b.
As premium grade offices age, rental
rates converge
Figure 3: Grade A office stock breakdown by rent level
sqm / M
9
Much of the Grade A & B office stock is aging and can no longer
command higher rent.
8
The difference in rent between a mid-range Grade A office space and
a high-grade office space is increasingly marginal. The price for a
mid-range Grade A office in Tokyo is between 30,000 and 40,000 yen
per tsubo per month. Offices within this price range account for about
half of the total office stock, compared with 2007, when offices in this
price range make up just 14% of total stock. Comparatively, buildings
with rents at around and above 50,000 yen per tsubo currently take
up the majority of the total stock. This suggests a situation where it
is becoming increasingly difficult to differentiate among high-grade
offices in the city centre.
6
Before 2008, leasing by foreign financial institutions helped to drive up
the price of premium office space in Japan. This cycle however has
seen a significant decrease in the number of foreign financial firms
that were able to afford the highest-tier rent.
7
5
40%
38%
4
35%
43%
42%
39%
52%
50%
3
2
1
0
37%
44%
38%
14%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-30,000
30,000-40,000
40,000-50,000
50,000-
*The rent levels are based on JPY per tsubo per month
Source: JLL
Compounding the issue is that several large-scale office complexes
are scheduled to be completed between 2018 and 2020 and that
tenants are adopting a wait-and-see stance to gauge how these new
completions will impact the rental market. This impedes rental growth.
C.
More efficient use of work spaces
During the previous market recovery from 2005 to 2007, employees
typically had a fixed space within the office. More recently however,
IT improvements as well as the introduction of a free-address desk
system and the increased ability to telecommute has led to more
efficient use of the work space. In 2008, the office area per person
was at 4.02 tsubo. In 2016 that number has decreased to 3.80 tsubo
per person2.
While space efficiencies and, therefore, cost savings are still key
priorities, corporations are increasingly looking at issues such as
employee productivity, engagement and staff retention and attraction.
Overall, the trend is for continued intensification of the workspace,
while the working environment will be more flexible to meet working
and lifestyle trends.
“In 2008, the office area per
person was at 4.02 tsubo.
In 2016 that number has
decreased to 3.80 tsubo per
person.”
Interestingly, a significant change in the workspace is best facilitated
through relocation to newer, more efficient office space and the trend
should continue to drive transaction volume. However, this trend is not
seen as a driver of net absorption of office space.
2
Xymax Real Estate Institute ‘Office Space per Person 2016’
The Renaissance of Tokyo CIty 7
d.
Limited corporate expansions
Since the implementation of Abenomics in 2013 many industries
and companies have achieved record profits. However, these profit
numbers are misleading and do not truly reflect the state of corporate
health. In 2015, total sales were 90% of what they were in 2007.
Therefore, the increase in profit was not a result of increased sales,
but due to cost cutting measures that were implemented in 2008
following the GFC, and this in turn curtails demand for office space.
Corporate investment has remained at a rate of 80% compared to
levels in 2007 despite a recent uptick. Profits generated by capital
investment are being distributed to shareholders or retained by the
company, instead of being used for expansions. Investment from
capital expenditure is not generating significant profit, which is a fairly
recent phenomenon for Japanese companies.
Figure 4: Corporate sales, profit and investment
2007 = 100
120
110
100
90
80
70
60
50
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Corporate sales
Corporate ordinary
Corporate investments
profits
Source: Ministry of Finance
8 JLL
4. Looking forward - office supply from 2016
In the past decade, the annual supply of Tokyo Grade A offices has
averaged about 290,000 square meters. By 2016 to 2020, the supply
of Grade A office will rise to 450,000 square meters per year. While
the increase may be large, we expect the impact on rents in the short
term to be relatively limited.
Figure 5: Tokyo Grade A supply
However, the annual scheduled Grade A office supply will climb to
660,000 square meters in 2018. Then, relatively large supply will
continue in 2019 and 2020. Based on historical data, Tokyo’s office
market has not experienced an increase of such magnitude over a
short period of time. The influence of this upcoming market supply is
a major concern for building owners, and will likely put pressure on
rental values.
700,000
sqm
900,000
800,000
600,000
500,000
400,000
300,000
200,000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
100,000
Source: Real Estate Intelligence Service (REIS), JLL
Large-scale projects have been scheduled to be supply till 2020 are
as the following.
Table 1: Tokyo Grade A supply
Address
Completion Year
Gross Floor Area
(sqm)
Stoley
Developer
Shibuya /
Sakuragaokacho,
Shibuya-ku
2018-2027
700,000
B7/47 etc.
Tokyu
Corporation, JR
East, Tokyo Metro
OH-1 Project
Otemachi 1,
Chiyoda-ku
2020
357,700
B5/31, B5/39
Mitsui Bussan,
Mitsui Fudosan
Toranomon Business Tower,
Toranomon Hills Station Tower
Toranomon 1,
Minato-ku
2019
2022
173,000
NA
B3/36
NA
Mori Building
Tokiwabashi District
Redevelopment Tower A,B
Otemachi 2,
Chiyoda-ku
2021
2027
140,000
490,000
B5/37
B5/61
Mitsubishi Estate
Yaesu 1 East Area Development
Yaesu 1,
Chiyoda-ku
2024
228,000
B4/54
Tokyo Tatemono
Sibuya Station Project
Source: JLL, each developer’s release
The Renaissance of Tokyo CIty 9
“These new offices will greatly
increase the competitiveness
and attractiveness of Tokyo and
enhance the city’s reputation
among MNCs as the preferred
location for their Asia Pacific
regional headquarters.”
While this increased supply will undoubtedly impact market
fundamentals, it is also expected to breathe new life into an office
market, where the existing stock is in need of refurbishments and
renewal. These new offices will greatly increase the competitiveness
and attractiveness of Tokyo and enhance the city’s reputation
among MNCs as the preferred location for their Asia Pacific regional
headquarters.
Map 1: Future office supply in Tokyo
Shinjuku-ku
Chiyoda-ku
Shibuya-ku
Chuo-ku
Minato-ku
2016
2017
2018
2019
2020
2021 -2025
Beyond 2026
Source: MAPIT
10 JLL
5. How record supply will be absorbed
As already stated, this large increase of office space particularly from
2018 is a major concern for the market. In this section, we analyse
the demand drivers that might help to mitigate the impact of record
office supply. We compare market conditions between 2001-2005 and
2016-2020
When analysing Grade A and B office supply in increments of five
years, the expected supply between 2016 and 2020 is almost exactly
the same level as the volume registered in the period 2001-2005. In
2003, the vacancy rate peaked at 9.5%, which itself was a 10-year
high. However, the rate swiftly dropped to around 1% in the following
year. In the early 2000s, how were the demand drivers different from
the period 2016-2020?
a.
Demand due to economic growth
The current rate of planned office supply is the same as levels shortly
after the year 2000. The office supply of Grade A and B offices totalled
1.17 million square meters in 2003, and 750,000 square meters in
2007 and 2012. All of these offices are currently being leased.
“The economic growth in the
period 2016-2020 is estimated
at 2.7% with a projected office
space demand of 2.3 million
square meters.”
Economic growth then recovered to 3.2% between 2011 and 2015,
when the demand for Grade ‘A’ and ‘B’ offices was 2.83 million square
meters.
Based on the data, there is a clear correlation between demand for
office space and economic growth.
According to Oxford Economics, Japan’s total real GDP growth rate
was 6.1% between the years of 2001 and 2005. GDP growth then
dropped to 1.7% from 2006 to 2010, largely due to the global financial
crisis of 2008 and 2009. At that time, office demand stood at 1.8
million square meters.
The economic growth in the period 2016-2020 is estimated at 2.7%
with a projected office space demand of 2.3 million square meters.
Assuming steady economic growth, this demand will be easily
absorbed in a market, which has a projected office supply of almost 3
million square meters. However, the vacancy rate will rise to 5.5% by
2020. This vacancy rate is relatively high compared to current levels.
However, it is still low compared with the vacancy rate in 2010, when
the market was recovering from the GFC.
Figure 6: Tokyo Grade A and B supply
Figure 7: Tokyo Grade A and B supply / absorption / Real GDP Growth
sqm
3,500,000
sqm
3,500,000
7.0%
3,000,000
3,000,000
6.0%
2,500,000
5.0%
2,000,000
4.0%
1,500,000
3.0%
1,000,000
2.0%
500,000
1.0%
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
0
2001-2005
2006-2010
2011-2015
2016-2020
*Grade B supply for 2019 and 2020 were estimated by current 10 years average
2001-2005
2006-2010
Supply
Net absorption
2011-2015
2016-2020
0.0%
Real GDP Growth
Vacancy Rate
Source: JLL, Oxford Economics, November 2016
Source: JLL
The Renaissance of Tokyo CIty 11
b.
Old buildings are being demolished and
fewer owner-occupied properties
With new office supply, dilapidated and aging properties were being
demolished. The figure below shows the ratio of new property area to
the area of demolished properties within Tokyo’s 5 wards in increments
of five years. Tokyo demolished approximately 1 million square meters
of floor space every five years.
“Tenants’ preference has clearly
shifted from outright ownership
to leasing of office space.”
Figure 9 shows office stock in Tokyo’s 5 wards based on time of
completion.
According to the data, about 5.0 million square meters, or 12% of
office space, was completed before 1969 and a further 27% or 11.4
million square meters, of office space was completed in the 1970s.
These buildings are now all approaching 40-50 years. The demolition
rate of these old buildings will likely accelerate in the future and this
will influence demand for newly built office space.
Another factor is that the share of owner-occupied Grade A office
buildings has decreased to around 25% in 2016 from over 30% in
2005. Tenants’ preference has clearly shifted from outright ownership
to leasing of office space.
Figure 8: Tokyo office demolition volume
Figure 9: Tokyo CBD office stock breakdown by completion year
sqm
0
5,004
12,103
-500,000
29%
12%
6,384
15%
-1,000,000
9,402
22%
2006-2010
2011-2015
Source: Estimated by Sumitomo Mitsui Trust Bank
12 JLL
1970~1979
1980~1989
1990~1999
-1,500,000
-2,000,000
~1969
9,128
2000~
22%
2016-2020
Source: Estimated by JLL based on the data from Tokyo Metropolitan Government,
October 2016
c.
IT sector occupancy on the rise
In 2005, Information Technology (IT) firms occupied a 16% share
of Grade A office space in Tokyo, the third largest share behind the
Finance and Insurance sector (21%) and Professional Services (20%).
By 2015, the IT sector’s share of office space has risen to 18%, the
same proportion as the Financial and Insurance sector. Meanwhile the
share of floor space occupied by Professional Service firm has fallen
to 17%.
Employee numbers in the IT sector have grown by 80 thousand
people in the last five years in Tokyo. Increasingly, IT firms are
relocating to newer, nicer buildings although some of these moves are
temporary as their old offices undergo renovation. We expect these
trends to continue into the future.
The decline in the share of office space take up by Financial and
Insurance industry can be attributed to a drop in demand from foreign
financial institutions. In fact, 10 years ago, foreign financial institutions
accounted for 50% of the total financial institution-occupied floor
space. This has declined to 30% in 2015.
Figure 10: Grade A Office Stock share breakdown by business sectors
0%
20%
2005
2015
21%
18%
40%
16%
18%
60%
20%
17%
80%
100%
12% 5% 11%
16%
12% 9% 8%
17%
Finance and insurance
Wholesale, retailer and trading
IT, information and
communications
Real estate, Construction
Professional service
Others
Manufactruing
Source: JLL
The Renaissance of Tokyo CIty 13
d.
Tokyo City population increases
According to census results, the total number of office workers in
Tokyo decreased by 2% between 2005 and 2010 due to the impacts
of the GFC.
Preliminary numbers from the Tokyo Metropolitan Government show
an increase of 3% between 2010 and 2015 (data for 2015 is still being
finalised). In the same period, the ratio of female workers is expected
to increase by 5%.
Between 2016 and 2020, these ratios are expected to remain flat.
After 2020, the total number of office workers is expected to decline.
Meanwhile, the number of people moving to Tokyo continues to rise.
According to national population census, the population in Tokyo
increased by 2.7% to 13.51 million in the five years to 2015, while
the overall population of Japan decreased. According to the 2013
population forecast analysed by the National Institute of Population
and Social Security Research, the population in Tokyo was estimated
to be 13.35 million in 2015. However, the actual population was about
160,000 more than the estimated number. Thus, there may be a shake
up from these projected figures.
The total number of office
workers in Tokyo decreased by
2% between 2005 and 2010 due
to the impacts of the GFC.
The female employment rate in Japan is still quite low relative to
the rest of the world. The promotion of the social and economic
advancement of women is a key strategy for economic growth under
Abenomics. An increase in the availability of nurseries and daycare centres, as well as other reforms to help support dual income
households are expected to boost the female workforce. In July of
2016, Tokyo elected its first female governor, Ms. Yuriko Koike, who is
expected to push for the continuation of these reforms. In addition to a
projected increase in the female workforce, the elderly are expected to
make up an ever increasing percentage of the working population.
Figure 11: Number of female and male office workers in Tokyo CBD
Figure 12: Tokyo population (Forecasted and Actual)
No. of officeworkers
1,850
Male and Female office worker
million
1,200
14.0
3% increase
1,800
1,100
13.5
1,000
900
1,750
5% increase
800
13.0
12.5
700
1,700
2000
2005
2010
Number of office workers
2015
2020
Male office workers
Female office workers
Source: Statistics Bureau, Tokyo Metropolitan Government
14 JLL
600
12.0
2000
2005
2010
2015
Forecasted Population (Tokyo)
2020
2025
2030
Actual Population (Tokyo)
Source: Statistics Bureau, National Institute of Population and Social Security Research
6. Impact on rent and capital markets
JLL predicts that the office supply between 2016 and 2020 will weigh
on Tokyo’s rent values going forward. Specifically, the supply from
2018 to 2020 will push up the vacancy rate in Tokyo Grade A and B
office market. We project rent prices will start declining from 2019.
However the magnitude of the decline will be much milder compared
with the period from 2008 to 2011 in the wake of the GFC.
However, this new office supply will provide more product choice
for institutional investors. There has been a lack of investment
opportunities in the Tokyo office market and some investors face
difficulties finding assets that meet their targeted returns. Over the
next decade, newer and cost effective office buildings with longterm income stream should attract a wider pool of investors seeking
opportunities in a capital intensive environment.
Over the next decade, newer
and cost effective office
buildings with long-term income
stream should attract a wider
pool of investors seeking
opportunities in a capital
intensive environment.
The trend for more flexible workspaces needs to be addressed by
developers. Facilities such as communal cafes/touchdown points,
communal workspaces for use by the building tenants (such as coworking areas), childcare facilities, healthcare and gyms and tenants’
shower rooms are increasingly in demand. Developers should also
consider the handover condition of office space, as tenants are
increasingly looking at different styles of fit-out, often without the
standard fittings.
Conclusion
As the rising rent cycle comes to an end, the new supply will expand
tenants’ choice and could stimulate leasing activities due to increased
relocations to these new offices within Tokyo. Also, as rent values
come under pressure, tenants from the peripheral areas may also
be enticed to move into the city centre. Increased demand for newer
offices will also lead to lower rentals for poorer grade offices with
inferior building specifications and locations.
increase Tokyo’s standing in the world’s marketplace.
While the planned supply until 2030 helps to rejuvenate and enhance
the attractiveness of Tokyo, the city’s lower-cost structure will boost its
competitiveness as a premium location for global companies’ Asian
operations. Some of the new supply is located in so-called designated
National Strategy Zones as part of a wider government effort to
In the longer term, this new office supply should significantly improve
Tokyo’s global commercial attractiveness and ensure that the city
remains on occupiers and investors’ radar beyond 2030 giving the
world’s most populous city a renaissance.
The recent unexpected U.S. election outcome has caused some
short-term market uncertainties. However the jury is still out on
Trump’s future policies. His focus on tax cuts, reduced regulation and
infrastructure spending should help to boost the U.S. economy, which
in turn will benefit Japan.
Authors
Takeshi Akagi
Head of Japan Research
+81 3 5501 9235
[email protected]
Sho Ito
Manager, Research
+81 3 5501 9248
[email protected]
The Renaissance of Tokyo CIty 15
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