Tokyo to get major new office spaces this year, but is there demand?

Tokyo’s central areas are known as premium, popular office locations, with a host of major company headquarters concentrated there and upscale workplaces seen as a status symbol.

Yet the vacancy rate of offices in the capital has actually been increasing in recent years due to the spread of remote work amid the pandemic. Against that backdrop, a massive supply of new office space is set to open in Tokyo this year as a number of redevelopment projects reach their completion.

Major developers are confident that the demand for high-class offices in central areas will be robust, as more companies are focusing on the importance of face-to-face communication. But some industry observers say that the outlook is uncertain.

Office vacancy statistics for Tokyo's five central wards — Chuo, Shibuya, Minato, Chiyoda and Shinjuku — have been floating at a higher rate compared with the pre-pandemic period. According to data from office brokerage Miki Shoji, the vacancy rate in February was 6.15%, while it was under 3% between March 2018 and July 2020.

In general, a vacancy rate exceeding 5% is considered to indicate oversupply, and the figure has topped that threshold for the past two years.

Statistics from Sanko Estate, meanwhile, also show that the vacancy rate for the five wards is higher: 4.66% in the fourth quarter of last year, in contrast to 0.69% in the same period in 2019.

Despite the rise in the vacancy rate, those five wards are expected to see more than 760,000 square meters of new office space this year — more than double the number seen last year and one of the highest levels in the past decade, according to Sanko Estate.

Before the pandemic, Tokyo’s office demand was soaring because Abenomics helped boost companies’ profits and employment, especially for women and elderly people.

“If companies have more workers, it naturally leads to more demand for office space,” said Toyokazu Imazeki, chief analyst at Sanko Estate.

Also, a number of firms were eager to have high-class offices in convenient locations, as such workplaces can help attract talent.

That's why it was not unusual for those companies to have already signed contracts for office space even when buildings were still under construction, Imazeki said.

But the impact of the pandemic and the shift toward remote work led companies to review the role of offices, and now the market for them is facing headwinds at a time when it is already seeing a higher vacancy rate.

Compared with some major cities overseas such as New York and London, Tokyo’s rate is still somewhat low. According to a report by JLL, New York City’s office vacancy figure stood at 15.9% in the fourth quarter of last year, while it was 8.5% for London in the same period.

Some in the real estate industry say that while Tokyo’s office demand was unusually high in the past, basic demand has not faded.

Imazeki said demand is indeed there, but it’s unlikely that it will be as strong as before the pandemic, since many companies will continue to incorporate remote work and won’t need as much space to accommodate all of their employees.

Those working in the front line are therefore "very alert" that the vacancy rate may continue to rise, Imazeki added.

Major developers, however, are striking an optimistic tone ahead of the launch of the vast amount of new office space.

One of those projects is Tokyo Midtown Yaesu, which opened Friday.

Most floors of the 45-story building, located right in front of Tokyo Station, are dedicated to office space, although it also incorporates shops and restaurants, as well as Bulgari’s first hotel in Japan.

In May last year, Toyo Keizai reported that Tokyo Midtown Yaesu was struggling to attract office tenants due to the pandemic, saying that only about 40% to 50% of the office space had been filled at that time.

But its developer, Mitsui Fudosan, said last week that it had already attracted enough tenants to fill the whole office space.

“It’s true that we were a little worried” when remote work was spreading in the early stage of the pandemic, said Takuya Fujii, general manager of the office building development department.

“But after engaging in remote work ourselves, we rediscovered that an in-person working style is important. We believe that our tenants must feel the same,” he said.

Now that the role of the office has changed, Fujii said it is crucial to improve the value of coming to the office. To that end, Tokyo Midtown Yaesu has a gym and facilities for networking with other business people.

The value that comes from the combination of a prime location and high-level functions will ensure demand is sound, he stressed.

“We don’t think the vacancy rate for such offices will be high at all,” Fujii said.

Away from Tokyo Midtown Yaesu, Sumitomo Realty & Development is managing a redevelopment project in the Mita district in Minato Ward, with the construction of an office tower having been completed last month.

The company did not disclose exactly how much office space has been filled so far, but the pace of attracting tenants is “going as well as planned.”

Also in Minato Ward, Mori Building is planning to open a new office space at its Toranomon Hills complex, and will complete the Azabudai Hills project this fall.

But it’s likely that the developers will need to be patient in attracting tenants, Imazeki said.

Before the pandemic, moving to a new office was quite simple, as companies just needed to calculate the necessary space based on the assumption that all employees would work there. Now it's more complicated.

“They have to think about the basic working style (at the new office), what the average ratio of workers going there will be and how they will balance this with remote work. ... They need to go through more in-house adjustments,” Imazeki said.

“Companies tend to take more time to make a decision to move the office now.”