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Explosive Growth of IT Companies Driving Demand for Office Space

Tech is making its presence felt in the Tokyo office market. More major Japanese IT companies than ever are moving in, and their foreign counterparts continue to do so as well. They are expanding with explosive speed, and the boom is pushing up a demand for floor . . .

2018.09.19

Explosive Growth of IT Companies Driving Demand for Office Space

Tech is making its presence felt in the Tokyo office market. More major Japanese IT companies than ever are moving in, and their foreign counterparts continue to do so as well. They are expanding with explosive speed, and the boom is pushing up a demand for floor space.

September 19,2018

IT companies are attractive to property owners to like

“Owners know that IT companies make great tenants,” says Keisuke Fukaya of the JLL Japan Markets Department. That is because, after seeing explosive growth, their need for office space is alive, well, and ever-increasing. This kind of momentum resembles when foreign IT companies enter the Japanese market. The typical model for foreign companies is to first set up branch offices with small staffs in serviced offices, and from there, conduct market research and look around for business opportunities. Then, after establishing full-fledged business operations, a company might rent an office space. According to Fukaya, “We received a request from a company that had started doing business in Japan just two months before, in a serviced office with only a few people on staff. They wanted a 165-square-meter office space, and they were looking for properties. Then, they suddenly changed their requests 990 square meters. Foreign IT companies like that are not unusual. The way their staffs expand is extraordinary.” He cannot conceal his awe as he speaks.

IT companies contribute to town branding

Shibuya: an area that built an era, known as “Bit Valley” owing to the numerous tech companies that call it home. Placing their bets on revitalization, the Tokyu Group focused their efforts on pushing forward an extensive redevelopment project near Shibuya Station. The strategy appears to have paid off—one big IT company after another has announced that they will be setting up shop in the area. Google Japan will be renting several whole office floors in the Shibuya Stream building, which opened September 13. The huge contract covers approximately 46,200 square meters of floor space. Major Japanese IT company Mixi has announced that they will be moving their headquarters to Shibuya Scramble Square, a building scheduled to open its doors in 2019. CyberAgent plans to use five floors of the same building. CyberAgent has also announced that they will be renting an entire office tower that is being developed by Sumitomo Realty & Development in Shibuya Center-Gai area, and name the building Abema Towers.

Shibuya has always held a unique status. It is known as a place where youth culture is born and spreads, but is also a business district that has attracted many creative workers and IT startups. But until now, it has lacked the large office spaces that are required by big companies. When a company grows, so does its need for space. Shibuya has been unable to meet those needs, and IT companies that got their start in Shibuya have always flowed out to other areas. For example, LINE moved from Shibuya Hikarie, a building completed in 2012, to Shinjuku Miraina Tower. But now, Shibuya’s fresh supply of large-scale offices are largely occupied by major players in the tech world. It’s a success story that shows just how high a demand IT companies have for office space.

IT ventures moving from Shibuya to Gotanda

However, the vacancy rate in Shibuya is extremely low, and most of the best properties are already filled. Potential tenants can’t rent, even if they want to. As this situation continues, rental costs continue to go up. “A year ago, B-grade office spaces were valued at 22,000 to 23,000 yen per tsubo.” (A tsubo is a unit of area approximately 3.3 square meters.) “But now, you see cases where the estimated price exceeds 28,000 yen per tsubo,” notes Masashi Narita, who handles office leasing in the JLL Japan Markets Department. Unable to bear the cost of renting, tech startups give up on Shibuya and look for properties in Ebisu or Meguro, but the vacant spaces they seek are quickly filled, and rental costs remain high. Where they end up is Gotanda, which, like Shibuya, is in the Jonan area of Tokyo and serviced by the JR Yamanote Line. Many IT companies with relatively short histories have come to call Gotanda home. The area has quickly started to attract attention as a new IT hub, to the point that in July 2018, a mutual support group called “Gotanda Valley” was formed. “As ‘Gotanda Valley’ gains recognition, applications—especially from tech startups—pour in as soon as you start looking for tenants,” Narita explains. It appears that the branding power of “IT” has an impact on the office market.

Roppongi is also popular with IT companies

What about Roppongi, which once churned out successful members of its “Hills Tribe”? Google Japan is moving to Shibuya, and Yahoo moved to Kioicho. It may seem like Roppongi is bleeding tech giants and losing its reputation as an IT hub, but that is not actually the case. “Google Japan’s headquarters has moved, but if you look closely, you’ll see that Roppongi is tremendously popular with some rapidly growing foreign and up-and-coming IT companies,” says Fukaya. Mercari, the sole unicorn of Japanese IT ventures, has been located in Roppongi Hills since March 2017, and the Japanese branches of Pokémon GO developer Niantic and Chinese search giant Baidu also have offices in the area. Even now, Roppongi is home to a lineup worthy of the label “IT hub.”

A focus on IT companies as a means of urban development

When tech companies gather, that can have an effect on a town branding. That’s a reason for major developers who take part in urban development to focus on attracting IT companies. In Shibuya and Gotanda, both mentioned previously, IT companies have formed mutual support organizations, and are contributing to community revitalization. In their guidelines for the area’s redevelopment, the Tokyu Corporation, a driving force behind urban development in Shibuya, describe a “mecca for IT companies and creators.” “IT company” is something of a blanket statement, covering a wide range of enterprises. A unique characteristic of the IT industry is that it fosters more cooperation than competition. Because IT companies often share friendly rapport, they are in favor of open innovation. Plus, big IT companies support startups and boost their growth, and when startups grow big, they help the next startups. An environment that supports the growth of startups—a “startup ecosystem”—creates ongoing demand for office space.

Even in Dai-Maru-Yu (a collective name for neighboring districts Otemachi, Marunouchi, and Yurakucho), a former hub for Japanese financial institutions and companies involved in heavy industry, efforts to attract IT ventures are growing. Mitsubishi Estate has established “Finolab,” a share office for FinTech ventures, in the Otemachi Building. By attracting IT companies with cutting-edge tech, a neighborhood can up its image and become more diverse. IT companies are seen by developers as key players in urban development.

Major IT companies changing how they pick their offices

On the other hand, according to Fukaya, “We’re starting to see changes in terms of which office areas IT companies like.” The aforementioned IT hubs are certainly doing well, but many major players in tech are going their own way. Some prominent examples include Yahoo, who is renting out the entire office building at Tokyo Garden Terrace Kioicho, as well as Rakuten, who moved their headquarters to the Futako Tamagawa Rise complex, and LINE, who moved from Shibuya to Shinjuku. Fukaya gives another example. “Salesforce set up shop in JP Tower, which opened in May 2012 right in front of Tokyo Station, and Twitter moved from the Ark Mori Building to Tokyo Square Garden in August 2015. Their moves were so different from the office-space strategy we’d seen from foreign IT companies up until then. It was a surprise to the industry.” Both buildings are in long-standing business districts well-loved by Japanese companies.

Fukaya continues, sharing his opinion, “IT companies are sensitive to what other IT companies are doing. They often ask us which areas other companies like. Before, ‘Shibuya and Roppongi’ was the standard answer, but now we have to explain that opinions are pretty spread out. In other words, there might not be any areas that don’t have the potential to attract growing IT companies.”

Employees of IT companies are known for their casual demeanor, often wearing T-shirts and shorts to work. Many owners of office buildings feel that does not match with their building’s image, and are hesitant to rent to tech companies. Plus, tech companies may be big renters that any owner would be grateful for, but they can also suffer sudden and dramatic cutbacks when faced with economic downturns. Especially in cases of one company renting out multiple floors or properties, owners can picture the struggle it would be to re-fill them if the company vacated. Although they come with some risks, IT companies’ explosive growth potential has a seductive draw that other types of business do not. Many IT ventures get money rained on them by, for example, venture capital firms, and so have no shortage of funds. A growing staff means growing business, which means a growing need for space—a need that we can meet. IT companies are sensitive to trends and the economy, and to attract them, striking their unique sensibilities is essential.