VIEWPOINT
JAPAN OFFICE
Tokyo Flexible Office Market
Set for More Prominent Role in Tokyo Office Market Yoshitaka Igarashi CBRE Research | Associate Director
Sayuri Kaneko CBRE Research | Analyst
Recent years have seen flexible offices*1 emerge as a popular solution to the demands created by the introduction of a wider range of working styles such as remote working. Despite this uptick in interest, flexible offices remain under-represented in the Tokyo office market in comparison to other major cities in Asia Pacific. While flexible offices comprised 4.7% of all office stock in the ten major Asia Pacific markets as of October 2020, the figure for Tokyo was at a much lower level of 2.0% (Figure 1). Figure 1: Flexible office market scale and share of the rental office market 300
9% Total volume(K tsubo) Total Penetration(RHS)
200
6%
100
3%
0
Beijing
Shanghai Singapore Bangalore Shenzhen Delhi NCR
Seoul
0% Mumbai Hong Kong Tokyo SAR Source: CBRE, October 2020.
*1 Offices such as co-working offices or serviced offices that do not necessarily require the signing of lease contracts, and are primarily used under the auspices of facility use contracts
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We believe the major factors behind the relatively low market share of flexible offices in Tokyo are: 1. the office contract structure; 2. fewer entrepreneurs; and 3. low vacancy rates. 1. OFFICE CONTRACT STRUCTURE Most lease contracts for small- and medium-sized office buildings, which comprise the majority of leased office floor space in Japan, are “traditional two-year leases”. These traditional leases permit the tenant to cancel the contract at any point during the lease period (with a few months notice), therefore allowing them to respond in a relatively agile way to unexpected changes in locational strategy that may arise during the period of the contract. For most other cities in Asia Pacific, lease periods are generally three years. While this is not markedly different to the situation in Japan, contract terms in other Asia Pacific cities tend to be far less tenant-friendly, with mid-term cancellations typically requiring the payment of some sort of pecuniary penalty. This makes it difficult for tenants to respond flexibly to reduce floor space or cancel office contracts altogether, should the need arise during the contract period. This heightens the appeal of flexible offices, whose appeal primarily lies in flexible contract periods and shorter required notice for cancellation. The fact that these merits are relatively smaller in Japan is one of the major factors behind the comparatively slow expansion of the country’s flexible office market. 2. FEWER ENTREPRENEURS As flexible offices feature flexible contract periods and lower initial costs than standard offices, they serve a key function as locations for the launch of new start-ups. In comparison to other major markets in Asia Pacific, Japan has a much lower percentage of entrepreneurs in its working population. Traditionally, flexible offices have been preferred by start-ups as places in which businesses can be launched quickly and at low cost and have increased in number as this demand has grown. In Japan, this demand has never been strong, which is another factor why flexible offices have not gained traction in the way they have in other markets.
Figure 2: Entrepreneurs as a percentage of the working population ( age 18-64) 16% 12% 8% 4% 0%
Japan
China
Hong Kong, SAR
Singapore
South Korea
India
Note: Data for Singapore is from 2014, data for Hong Kong SAR is from 2016, and data for all other countries is from 2019. Source: Global Entrepreneurship Monitor, CBRE, 2019.
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3. LOW VACANCY RATES While the average All-Grade office vacancy rate among the ten major Asia Pacific markets over the five-year period from the start of Q1 2016 to Q4 2020 stood at 11.9%*2, Tokyo alone had a significantly lower rate of 1.4% (Figure 3). This means that, in comparison to those in the other major cities in the region, flexible office operators in Tokyo have found it much more difficult to secure space in their desired locations. This is the third and final factor for the relative lack of expansion of the flexible office market in the city.
Figure 3: Average vacancy rate
flexible office share in major markets
Average vacancy rate (Q1 2016 - Q4 2020)
25%
Mumbai
20%
Delhi
Shanghai
15%
Average vacancy rate for all 10 centres
Shenzhen
10%
Bangalore
Seoul
5%
Hong Kong Tokyo
Beijing
Singapore
0% 0%
2%
4%
6%
8%
Flexible office stock as a percentage of All-Grade office stock Source: CBRE, March 2021.
More recently, however, the spread of COVID-19 has acted as a catalyst to bring about changes in all of these factors which have thus far obstructed the establishment of flexible offices in Japan. 1. CHANGES TO OFFICE CONTRACT STRUCTURE According to the results of CBRE Japan’s annual occupier surveys, while 35% of all office lease contracts in Japan were fixed-term lease contracts in 2016, that figure had risen to 43% by 2020 (Figure 4). Fixed-term contracts have been widely adopted in large office buildings owned by major developers, with an increase in supply in such properties gradually driving up the overall fixed-term lease ratio. Furthermore, contract periods for such fixed-term leases generally tend to be longer than those for traditional leases. In general, there has been a gradual shift towards increased rigidity in tenant lease terms. *2 Vacancy rate for Hong Kong SAR, Seoul, Delhi, Mumbai and Bangalore refers to Grade A vacancy.
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At the same time, in addition to the uncertainty surrounding the economic stagnation triggered by the pandemic, the number of tenants considering pursuing new working styles is also on the rise. The low initial and withdrawal costs and flexible contract structures offered by flexible offices mean that more tenants are likely to consider flexible offices as an option as they re-evaluate their office strategies in the light of fluctuations in company performance and changes in working styles.
Figure 4: Office contract structure
Fixed Lease Term Traditional Lease
35%
2016 (131)
65%
31%
2017 (306)
69%
36%
2018 (362)
64%
2019 (302)
42%
58%
2020 (206)
43%
57%
0%
20%
40%
60%
80%
100%
Source: CBRE Office Occupier Survey, 2016-2020. Note: Figures in parentheses indicate number of respondents.
2. GROWTH IN NUMBER OF ENTREPRENEURS Based on the concept that new companies generate vitality through a necessary injection of new blood, thereby providing the impetus for economic growth, the Japanese government has put in place a number of new initiatives to encourage the establishment of start-ups*3. In addition to these measures, the publication of the Guidelines for Promotion of Side Work issued by the Ministry of Health, Labour and Welfare in 2018, along with a decision by some major firms particularly affected by the impact of the COVID-19 pandemic to allow employees to undertake outside work, has meant that individuals are now being encouraged to pursue secondary business projects more than ever before. The promotion of side businesses may serve to ease income concerns and should lead to an increase in new ventures. When this happens, flexible offices can provide an attractive solution to increased demand for workplaces with low initial costs that enable the swift launch of new businesses while accommodating potentially rapid change in staff numbers.
*3 Recent initiatives include fiscal aid for the launch of new IT ventures in regional areas (2021), while previous schemes include the “sandbox” programme for the swift testing of innovations in mobility and technology (2018).
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3. CHANGES IN VACANCY RATES Ever since the increase in popularity of flexible offices observed in Japan beginning in 2018, the vacancy rate for office buildings in the 23 wards of central Tokyo has continually hovered at around 1%. In recent quarters, however, poor corporate earnings performance and the permeation of remote working as a result of measures to contain the COVID-19 pandemic has led to an increase in office lease cancellations. Furthermore, upcoming new office building supply is set to exceed historical average. For these reasons, CBRE forecasts the vacancy rate for Tokyo 23 wards to rise over the next few years (Figure 5). This trend should make it easier for third-party flexible office operators to establish properties in desirable locations and buildings. The number of flexible offices run by developers or other building owners themselves is also projected to increase. New Supply excluding Grade A Grade A New Supply Average New Supply (2000 to 2020) Tokyo All-grade Vacancy Rate(RHS)
K tsubo 400
8%
Forecast
350
7%
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
0%
2013
0
2012
1%
2011
50
2010
2%
2009
100
2008
3%
2007
150
2006
4%
2005
200
2004
5%
2003
250
2002
6%
2001
300
2000
千
Figure 5: Tokyo All -Grade vacancy rate
Source: CBRE, January 2021.
As discussed, the factors that have prevented flexible offices from truly taking root in Japan are gradually undergoing changes which are rendering them less significant. Furthermore, the rapid emergence of remote working as a result of the COVID-19 pandemic is serving to further accentuate the popularity of the flexible office as an alternative location for teleworking. CBRE’s tenant surveys already show an increase in occupiers utilizing flexible offices, with this figure rising from 21% to 23% over the past year (Figure 6). With a further 21% of respondents indicating that they plan to begin using or increase their use of flexible offices within the next year (Figure 7), this data suggests that demand for flexible offices as a new workplace option is likely to increase. It therefore appears certain that flexible offices will play a more prominent role within the Tokyo rental office market in the future.
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Figure 6: Tenants using third -party operated flexible offices (nationwide)
Nov. 2019 (n=260)
21%
Oct. 2020 (n=150)
0%
23%
10%
20%
30%
Source: CBRE Office Occupier Survey, February 2021. Note: Figures in parentheses indicate number of respondents.
Figure 7: Tenants planning to begin using or increase usage of third-party operated flexible offices in the next year (nationwide)
21%
Source: CBRE Office Occupier Survey, February 2021.
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GLOBAL RESEARCH
This report was prepared by CBRE Japan Research, which forms part of CBRE Global Research—a network of preeminent researchers who collaborate to provide real estate market research, econometric forecasting to real estate investors and occupiers around the globe. To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway
For more information about this ViewPoint, please contact: JAPAN RESEARCH
Hiroshi Okubo
Yoshitaka Igarashi
Executive Director
Associate Director
hiroshi.okubo@cbre.co.jp
yoshitaka.igarashi@cbre.co.jp
Sayuri Kaneko Analyst sayuri.kaneko@cbre.co.jp
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