The Year Past 2009 , The Year Ahead 2010
The Year Past 2009
The onset of the global economic crisis from late 2008 has inevitably clipped demand for Tokyo office accommodation. Those companies hardest hit by the recession have mostly chosen relocation to cheaper premises as the fastest means of cutting costs. But many sitting tenants determined that negotiating better lease terms with landlords avoided the inconvenience of moving.
Owners of newer Class A buildings initially tried to resist pressure to lower rents, but once one landlord was seen to buckle, others felt obliged to quickly follow. Consequently, average rents for prestige properties in Tokyo’s three central wards declined by 30~50% during 2009 from the 2007 peak.
Fortunately for owners, the recession struck at a time when the volume of new space entering the Tokyo office market was limited. Vacancy rates in the three central wards rose to 6.1% by December 2009 compared with 3.1% in January, but this was still lower than some real estate specialists had feared.
Moreover, those companies whose businesses have been less affected by the recession seized upon the softening of the office market in 2009 to upgrade to A-class buildings that had become affordable. Chemicals giant BASF, for instance, has moved to Roppongi Hills, apparel maker Fast Retailing (Uniqlo) to Midtown Tower, and snacks maker Calbee Foods to Marunouchi Trust Main Tower.
This trend will continue in 2010.
The Year Ahead 2010
The slow pace of economic recovery means that Tokyo’s office rental market will remain soft for at least the first part of 2010. Though rents have generally stabilized, those in prime properties will remain 30~50% lower than their 2007 highs, and vacancy rates will likely remain around 5-6%.
But 2010 will be the bottom of the business cycle and vacancy rates are expected to peak by summer or autumn. The lessees’ market will persist but only during the first part of the year. By late 2010 through early 2011, incentives such as rent-free periods will decrease and landlord attitudes will harden.
Behind this is the fact that in 2010, only 175,000 tsubo of new space will be added in Tokyo’s 23 wards, and this constraint on new space will prevent any further decline in vacancy rates.
Tokyo is not expected to see the introduction of significant quantities of new space until 2011-2012, and much of this will be in suburban areas. Some properties, such as those now being built in Osaki and Toyosu, are likely to be successful, but others in areas that Japanese companies consider a little remote could face challenges. Companies seeking space in peaceful ‘campus-like’ areas will enjoy a luxury of choice.
On the other hand, owners of existing Class A properties are rushing to refurbish their buildings to meet the new competition, and during 2010 many tenants will find the temptation to upgrade to better space hard to resist.
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