Are soaring Tokyo office rents starting to drive tenants out of the city?

February 21, 2008
By Ken Worsley

We’ve been watching the Tokyo office rent situation with great interest over the past year or so, as prices seem to climb into areas where it is soon going to become prohibitive for firms to rent prime space in downtown Tokyo. Last week, Miki Shoji reported that rents had increased another 2.2% in January, while Ikoma Data reported rents were up 0.7% and Building Kikaku declared that rents had climbed 0.9% over the same time.

Vacancy rates, however, remain low: 2.55% according to Miki Shoji, 1.7% by Ikoma, and 2.83% according to Building Kikaku.

Of course, this time of year is when office (and residential) rents tend to climb; February and March are prime moving seasons in Japan. On Monday, the Nikkei reported that “the office rental market in downtown Tokyo is showing signs of reversing course, with some corporate tenants being forced to move to more inexpensive areas due to the 10-30% annual spike in rents in the capital’s busiest business districts.”

This is hardly surprising, and something we’ve been predicting for some time, though we assumed the true pain in the market is still some time away. Nonetheless, the Nikkei reports that Mori Trust has not yet begun to seek tenants for its Marunouchi Trust Main Building, which is slated to open in November. Why is this important? A few years ago, the Marunouchi Trust North Tower opened at “nearly full occupancy.” Should the situation be different this time around, people will take notice.

Although the Nikkei says that the current situation is still very much a seller’s market, several firms are noted as recently securing space outside of Tokyo, with Intelligence Limited moving its call center to Sendai (where Miyagi Prefecture is offering subsidies to firms that bring jobs to the area), and Manpower moving its head office down to Yokohama.

Is this the beginning of a trend? It’s a bit too early to call it that just yet, and several firms, including Morgan Stanley and Mitsui Fudosan, are continuing to build their property portfolios in the downtown area, perhaps due in part to having pockets deep enough to withstand any potential temporary downturns.

The Nikkei also points to low REIT yields as a sign that the market is turning bearish, though it makes no mention of the fact that Tokyo’s REIT market is still underdeveloped and in need of serious deregulation if it is to compete internationally.

What worries us most is the potential that banks are set to become more selective about their borrowers over the coming year, as losses related to subprime holdings are expected to increase over the next few months. Outgoing Bank of Japan Governor Toshihiko Fukui promised to do his part yesterday, telling the Lower House Financial, Fiscal and Monetary Policy Committee:

As financial markets are unstable now, we must supply the necessary liquidity to the money market, which is the keystone of the financial and capital markets. It’s not enough for various countries to just continue to set the appropriate level of interest rates.

Once again, we hear Mr Fukui simply restating the duties of his position rather than saying what he actually intends to do (He’s been getting away with this for some time now). Later he even admitted that he has no idea why the Japanese economy is even growing right now: “Somehow, the Japanese economy, which luckily has already dealt with its past non-performing loan problem, is overall continuing to maintain its forward-looking cycle.”

We expect better than “somehow” from the Governor of the BOJ. We also would not expect to see the conflation of Japan’s decade-old non-performing loan problem with the current situation in the United States. Then again, Mr Fukui doesn’t have to worry about rent hikes.

Filed Under Bank of Japan, Business, Real Estate