Landlords are Raising Rents, and Tenants are Forced to Take Action

In Tokyo’s grade-A office market, vacant rooms are running dry. More landlords are intent on raising rent. With increasing rent looming over their heads, tenants are trying to find a way out. One option for tenants who are being forced to reexamine their office strategies is reassessment of their rent.

March 22, 2018

Recovery of the office building market drives landlords to raise rents

According to research by the JLL Japan Research Department, the vacancy rate of grade-A offices in Tokyo as of the end of January 2018 is 2.5%. The number falls far below 5%— the threshold for increasing rent, and the market is a complete lender’s market. There have been small changes in rent rates before, but as of late, more and more tenants are being notified of big jumps in their rent when their leases are due for renewal. They are pressed to rethink their office strategies.

Increases in office rents may vary depending when the tenants moved in, but if monthly rent were to increase by 1,000 yen per tsubo, tenants who rent large spaces would see a substantial impact on their rent. (A tsubo is a unit of area equivalent to approximately 3.3 square meters.) If a tenant were renting 5,000 tsubo, its annual rent would increase by 60 million yen (1,000 yen per tsubo, times a floor area of 5,000 tsubo times 12 months). Many tenants would not be able to accept such a huge change in rent without a fight.

Tenant representation can save over one billion in costs

Yo Ushijima, who belongs to the Tenant Representation Section, a team in the JLL Japan Markets Department that provides support for tenants’ office strategies, points out, “We are receiving more requests from tenants who received a notice of rent increase to research trends in the office market, like market rent and vacancies in other buildings. They want to know if the increase in their rent is reasonable, and they ask for our advice, including advice on relocating their offices.” He gives one example of a tenant who negotiated rent with its landlord using JLL’s research as a reference and managed to cut more than one billion yen from the amount initially presented by the landlord. “Getting a landlord to compromise is not easy—only tenants who rent a large amount of floor space can do that, because it would be difficult to refill that space in a short period of time. If a tenant rents a 10,000-tsubo space, for instance, it will take time to refill this large space, not matter how much the market is booming,” explains Ushijima about what lies behind the success story.

Not only that, the quantity of new grade-A offices that will be made available from 2018 to 2020 will surpass past averages for three successive years, and it is feared that there will be more vacant spaces. The first signs of increasing vacancy rates were observed in late 2016. Back then, offering rates of grade-A office buildings that were going to be completed soon skyrocketed so high that prospective tenants couldn’t afford them, and the landlords of these buildings were not able to get as many leases signed as they first expected. After that, landlords went soft. Although the space in grade-A office buildings that were completed not only in 2017 but also in 2018 is steadily being filled, it is unclear how the exiting offices that the tenants of these new buildings relocated from are faring in refilling their vacant space. Therefore, it is expected that there will be more rent negotiations between landlords and tenants.

A rent increase is a golden opportunity to restructure office strategies

Ushijima notes that rent increases “should be used as a golden opportunity to give your office strategies an overhaul.” When you consider the impact it would have on your business if you accepted a raise in rent and stayed in your current office, and what impact it would have if you relocated to another building, it might be better to relocate to a new place, even if it costs a lot in the short term. In other cases, you might be able to vacate part of the floor space you are renting, and cover the office space that you need with an external flexible office. While examining these office strategies, you should remember that you can also choose to negotiate on the increase in rent with your landlord. It may not reduce the amount of rent, but doing so can earn you a rent-free period. Hopefully, landlords and tenants stay in win-win relationships, and help each other grow.