In the Tokyo office market, supply is barely meeting demand. As landlords increase rent rates, more and more tenants are revising the floor plans of their rented spaces. According to a survey by JLL, the vacancy rate of A-grade office spaces in Tokyo as of the end of July 2018 was 1.9%. It's a lender’s market, and tenants . . .
Shortage of Office Space Boosting Demand for Restacking
In the Tokyo office market, supply is barely meeting demand. As landlords increase rent rates, more and more tenants are revising the floor plans of their rented spaces.
Tenants troubled by rent increase notices
According to a survey by JLL, the vacancy rate of A-grade office spaces in Tokyo as of the end of July 2018 was 1.9%. It's a lender’s market, and tenants whose lease agreements are up for renewal are receiving a surge of rent increase notices from landlords. Many are at a loss, unsure whether to accept the increased rent, relocate to a building in the suburbs with reasonable rent, or cut down on floor space and offset the increase in rent. In the past year, JLL has seen a jump in the number of clients seeking advice on how to revise their office strategies. In particular, we see more companies that rent multiple floors opting for restacking—making more efficient office layouts and reducing floor area.
“This year, we have been receiving inquiries from many companies, both foreign-owned and Japanese, regarding restacking,” explains Takeo Matsumura of the Project and Development Management Department at JLL Japan. This is because central Tokyo is running out of vacant office spaces, and more landlords are notifying tenants of rent increases at the time of their contract renewals. Office lease agreements are typically fixed-term tenancy agreements with specified terms, and once those terms are up, they must be renewed. The current market is a lender’s market, in which landlords can fill the space at higher rents even after the previous tenants have vacated, and therefore are not afraid to increase the rent against the existing tenants. Hence, tenants who have been occupying a space for years are getting notices of rent increases from bullish landlords when their lease agreement is about to be renewed. New A-grade office buildings, in particular, tend to place weight on occupancy rate when the construction is complete, and some lease the space at discounted prices in order to attract tenants who will occupy more space. Then, when it is time to renew the lease agreement, and the rent rate is adjusted to current market price, it is entirely possible for the rent to increase by 30 to 40%. This is not normal.
It is not as though services are added to make up for the increase in the rent, though, and many tenants are not happy with their rent skyrocketing simply because of the ups and downs of the market. The option they turn to is revising their office strategies, expecting that they will need to relocate or cut back on floor area. “In cases of foreign-owned enterprises, the global headquarters that have the final say will hardly approve of the increase in rental costs that the landlords are looking for. At the very least, they need to maintain the same level of costs,” notes Matsumura. “We are also getting more inquiries from Japanese companies, etc. who tend to be more cost-conscious and considerate of their activist shareholders.”
Aside from the issue of cost, another factor as to why there have been more inquiries recently is companies’ initiatives in work-style reform. If their only aim were cost reduction, they could simply relocate their offices to the suburbs, away from the city center. However, this results in poor accessibility, interferes with business activities, and is a disadvantage when it comes to recruiting good human resources. “Most Japanese companies are primarily concerned with work-style reform, and cost reduction is just a side goal,” says Matsumura. Regardless, enterprises must, through their office strategies, achieve two contrasting goals: keeping rental costs down, and growing their business. That's a tall order.
Optimizing office floor space
What advice does JLL give to clients facing such a difficult task? First, we consider several scenarios. What if the client accepts the rent increase without relocating? What if they relocate? What about reducing the floor area of their office without relocating? The firm compares the costs of each scenario and works with the client to find a solution that they will be happy with. Although the final choice will vary “case-by-case,” explains Matsumura, “Many companies opt to cut down on wasted floor space in the office and create a work environment that matches with the trend of work-style reform.” When making such a move, he says, a firm might introduce the concept of ABW (activity-based working) into their office designs.
Often confused with free-address workspaces, in which workers can sit anywhere they want, ABW’s most notable feature is that seating arrangements and work stations are chosen by the workers based on the work they are doing. In addition to typical free-address desks, workers may choose to work in a silent room, where they can focus on their tasks in a quiet environment, or in a lounge, where they can communicate with others casually, as though in a café. They can freely choose their workspace based on their mood and situation. Matsumura explains the advantages of introducing an ABW workspace. “Switching to ABW can reduce space by about 20%, compared to conventional offices with islands of cubicles with the same number of employees,” though the advantages of doing so vary “case-by-case.” If a company is renting 3,300 square meters, it can cut off 660 square meters and cut rental costs by 20%.
An ABW enables more efficient use of floor space by eliminating wasted space on the basis of thorough research on the use of office space. Say that a company has an independent accounting system for each department, and that the office rent is divided proportionally between the departments. Each department has their own meeting room, but those rooms are unused most of the time. If this hypothetical company adopted an ABW design, in which each workspace is not fixed, they could share meeting rooms, and therefore could minimize their floor area. If there is excess space in the office, it can serve as a temporary office during renovations, removing the need to move out while construction is going on.
“Every office has meeting rooms and common spaces that are rarely used,” points out Matsumura. “Ask the top management and the workers how the office is used, and you will find unneeded space.” Restacking is gaining recognition as one of few methods with which a business can achieve both cost reduction and work-style reform.