almost certain that the number of firms relocating will continue
to increase through 2012. This is partly driven by the need to
occupy a space designed to support current business and staffing
requirements rather than continuing to try to use only a portion
of an older office layout.
Other factors are supply and vacancy. Average Tokyo office
market vacancy today is near 9 percent, but most buildings
either enjoy very low vacancy or suffer with rates that are multiples of the market average. A new pressure on this unbalanced
vacancy is a significant supply of large buildings completing
construction in the 2011-2012 period. The first wave is mainly
outside of the three main office wards, but central buildings are
the focus in 2012 and for the smaller supply projected for 2013.
This will pressure new buildings to offer lower rents and greater
incentives to pull tenants from existing buildings. As relocations
increase, the currently lumpy vacancy will become more balanced between buildings and locations before eventually shifting to inferior locations and older or smaller properties.
Investors
Asia has an amazing seven of the top 10 cities for investment
sales globally. Tokyo recently ranked #4. The decline in capital
values across all property types nationwide since 2007 appears
to be subsiding. Transaction volume has clearly begun to pick up
after several anemic years. Financing remains challenging with
strict valuations and LTVs (loan to value) in the 50 percent to 60
percent range. While there are a number of NPLs (
non-perform-ing loans), lenders are generally resetting maturities or quietly
securing replacement owners and supplying any required capital in what sometimes represents, “extend and pretend.” REITs
have had the additional benefit of formal and tacit government
support for credit, mergers and sponsorship changes. Overall,
the economy has rallied from the last bottom, but is facing a
number challenges including a near record strength Japanese
yen (JPY).
There is a clear increase in investor sentiment
towards Japan as many perceive that a market
bottom is near. Tokyo remains the focus for institutional investors with little interest in properties outside the metropolitan area. The ability to
secure financing continues to be a factor supporting Tokyo over other Japanese cities. Multifamily
residential became a core interest to numerous
investors in 2010 due to the stability of rents and
occupancy in comparison to a less certain near-term dynamic in office and industrial markets.
The rush to residential and ongoing cap-rate compression will begin to motivate investors back
towards Tokyo office and industrial in 2011 and a
few years later, into asset classes in other cities.
Occupiers
The Tokyo office market is one of the world’s
largest and most dynamic. Building scale, specifications, and quality have continually increased
over several decades while rents have declined in
JPY terms. Still, the market is always ranked in
the top tier globally by cost. Most multinational
firms maintain an office presence here.
Landlords suffered mightily during the financial crisis as tenants aggressively reduced space in currently leased locations
while avoiding relocations. Demand has begun to stabilize, as
have concerns about corporate balance sheets. The result was
an increasing number of relocations in 2010 with an even more
active market likely during the next 24 months. Coming out of
intense restructuring, tenants are seeking better premises and a
more efficient and modern office layout but are not planning to
significantly increase the amount of space leased. While demand
is stabilizing, supply is more problematic. New completions of
larger buildings in and around Tokyo are greater in 2011-12 than
any year since 2003.
Overall, the real estate market is emerging from a double
whammy of homegrown and global turmoil. The recent crash
was catastrophic for some and has created new opportunities
for others. Compared to the 1980s economic bubble and the
1990s aftermath, the recent problems are small indeed. In the
meantime, Japan continues to test solutions to its macroeconomic issues that will impact the real estate market and provide
trail markers for other nations as their populations and markets
mature.
