When you hear "The year-X problem", what do you imagine? Globally, well-known ones are the "Y2K bug", or the "2010 IP address depletion" problem. In recent years, Japan has seen the "2007 problem" of the mass retirement of Baby boomers, or the "2011 problem" of the switchover from analog to digital TV broadcasts, with these "Year-X" problems seeming to occur almost yearly. Of course, there were many “problems” among them simply not worthy of mention.
As for the current situation, one subject being talked about in certain parts of the real estate and other industries is the "2018 problem”. Due to the large supply of office building space in 2018, there is concern that the balance of supply and demand in the 23 wards of Tokyo will collapse. There is indeed no shortage of large scale office building construction projects scheduled to be completed around 2018. Looking at the "current skyscraper construction database", there are 10 office towers over 100m tall, starting with the Shibuya Station Nagai District Project in Shibuya and the Otemachi 2 Chome District A and B Towers in Chiyoda ward (with 7 towers over 150m tall) scheduled to be completed in 2018.
However, looking at the office building supply plan for 2016 and 17, there are 6 towers in 2016 (All over 150m), and 9 in 2017 (Only 1 over 150m), meaning 2018 is hardly an exception. Further, the average floor space supply from 2011-2015 was 1.17 million m2 and is predicted to be only 1.09 million m2 from 2016-2020, (According to Mori Building Investigations, including plans), making the supply in the 5 years after 2016 not particularly large.
According to an investigation by the office brokerage giant Miki Shoji, the vacancy rate of the 5 central wards of Tokyo pivotal to business (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was 4.07% as of June 2016. In addition to having improved for more than 4 consecutive years, it remains below the supply and demand goal of 5% for 12 consecutive months. Particularly, it is impressive that the vacancy rate for newly constructed buildings in May of the same year went from 23.3% to 18.7% in a rapid drop. Further, the average rent per "Tsubo" (A Japanese measurement equaling 3.3 square meters) saw strong increases for 30 consecutive months.
So why is 2018 seen as a risk in the real estate industry? This is because there is one major factor predicted to greatly weaken the demand for office buildings going into 2017.
Following the Lehman shock in 2018, Japanese companies gave priority to internal reserves and suppressed investment. After that, along with the recovery of economy there was an increase in companies moving their head offices, and office demand is booming even now. However, it seems that after 2018 the supply will exceed demand, causing price erosion.
As previously mentioned, while the office building market has concerns of price falls, it could be said to be in good condition. However, with the sharp appreciation of the yen, and leading companies predicting the exchange rate to fall to 110 yen to the dollar, there is the strong possibility that results will worsen and investment plans will be revised downwards. If this is the case, then it is perfectly possible the office building market will see price erosion even before 2018.
In fact, some think tanks such as the NLI Research Institute indicate a risk that for approximately 2 to 3 years after 2017, office rents will continue to fall. Whether the "2018 problem" will manifest seems likely to be heavily influenced by the exchange market trends, whether or not foreign companies can be attracted, entrepreneurial trends in the IT and game related industries, and demand for retail outlets and hotels based on the inbound market. For now, it seems that the vacancy rates of office buildings are something we should all keep an eye on.
Aug. 31, 2016