From 2018 to 2020, as much as 1.7 million square meters of A-grade office space will become available in the city center. Existing buildings, often seen as having lower specs than new buildings, are expected to suffer from high vacancy rates when tenants move to buildings with better conditions, but...
Will a large supply of new buildings cause existing buildings to face a vacancy crisis?
It is the sad fate of Japanese buildings to lose their property value over time. Office buildings are no exception—conventional wisdom says the newer the better. In the Tokyo office market, offered rent in new buildings is more expensive than it is in existing buildings by more than 20%. However, the latest A-grade offices are opening for business with occupancies already at maximum, or close to it.
In the Tokyo office market, which operates based on “newness supremacy,” roughly 1.7 million square meters of new office space will be made available from 2018 to 2020. Some fear that, due to the large supply of new buildings, demand may decrease and occupancy rates might fall. Existing buildings, often seen as having lower specs than new buildings, are expected to suffer from high vacancy rates. The demand for new buildings is sound, since they offer a large amount of spaces that meet needs to aggregate offices, and it is thought that refilling existing buildings after tenants left would take time and effort. However, the situation is actually quite different, explains Takaaki Yokoyama of the JLL Japan Markets Department. “Many old high-rise buildings go through regular large-scale remodeling and reconstruction. By enhancing their specs so that they can compete with new buildings and improving tenant services, they have become a hot property for leasing again.”
Renovations to match the specs of new buildings
The Kasumigaseki Buildings was completed in 1968, making it Japan’s first high-rise building. This building is a success story of large-scale renovations. After the 20th anniversary of its completion, it went through large-scale renovations three times between 1988 to 2009. Not only have the building’s facilities, exterior wall, and standard floor been renovated, but restaurants and outdoor open spaces were developed and revamped to keep the facility up to date. During renovations from 2015 to 2016, they didn’t simply focus on improving their specs, but also renovated their disaster control center and a carriage porch, so that tenant employees and visitors can rest assured of the building’s safety. The building’s value keeps increasing, 50 years after its completion.
Facilities and other “hard” elements of a building will go out of date over time, but they can be renovated to match their specs to those of a new building. For example, Hibiya International Building, a large office building completed in 1981, has renovated both its common spaces and privately operated spaces. The common spaces were renovated to include a new 500-square-meter business support lounge only for tenants and the designs of elevator hall, hallways, doors and direct signs were refined. Emergency generators capable of supplying power for 35 hours to the privately operated spaces (15VA/square meters in a limited area) were also added, and those spaces got a new air conditioning system, as well. The building’s office floors could only be divided into four zones before, but now, they can be divided into 18. At 2450 mm, the ceiling height was the building’s weakest point, but it was changed to 2630 mm. Almost all privately operated spaces now have LED lighting. “If you look at these buildings now, it’s hard to believe they were built in the 70’s and 80’s. The gap between their appearance and age is very appealing to some prospective tenants,” says Yokoyama.
Focus on services for tenants
Another feature of this new wave of renovations is approaches that focus on “soft” services. Yokoyama notes that, In Sunshine 60, a complex in Tokyo’s Ikebukuro containing a shopping mall, a hotel, and more, “Not only do tenants’ employees get discounts at the aquarium, restaurants, clothing stores, and the hotel, but a lounge space and cafeteria only for tenants are also available.” Other building offer nap rooms for tenant employees that are available for free for a certain period of time. These rooms may be scented with aromas and or even equipped with massage chairs. “New A-grade office buildings may offer lounges for tenant employees, but there aren’t many examples of “soft” services being provided. As for tenants, the welfare of their employees is an incentive that no manager can ignore,” notes Yokoyama.
Renovating a building and enhancing “soft” services definitely accelerates the process leading up to the signing of a lease agreement. As for the cost of rent, “Vacant rooms are getting filled, even when the rent is set a little high,” says Yokoyama. It seems that the effect is obvious. In the present situation, the gap between the popularity of old buildings and new buildings is getting smaller.
Yokoyama says, “To begin with, tenants looking for a new A-grade office need to secure a large amount of space. It is difficult to find that kind of space in existing office buildings already in operation. Some tenants prefer new buildings ‘out of necessity.’ On the other hand, other tenants don’t have a strong preference between old and new buildings. Many tenants choose properties comprehensively based on location, rent and services, and have no problems with existing buildings that have been renovated.”
An older, renovated building can have the contrast of an old-fashioned exterior and a cutting-edge interior. The popularity of “old yet new” historical buildings is driven by well-planned renovations to provide better services to tenants.