Tokyo property faces oversupply
TOKYO could topple as the world's most expensive commercial office property market with an impending massive oversupply of new space expected to push vacancy rates to unprecedented levels and force landlords to slash rents.
A report by property agent Richard Ellis says unless current rental levels are reduced dramatically and the Japanese economy experiences a sharp upturn, boosting take-up rates, prospects for the office market are poor.
''It appears unrealistic Tokyo can maintain prime central business district rents at twice the next highest in the world when the overall market is so oversupplied and demand so weak,'' the report says.
Reduced demand for office accommodation and plentiful supply have resulted in a sharp correction of office rents.
Richard Ellis (Tokyo) analysis shows average achievable rents at June 30 were 20 to 40 per cent below asking prices in December last year.
In one of the most closely guarded landlord/tenant secrets, Salomon Brothers Asia is rumoured to have renegotiated its rents down some 50 per cent in a prime business area.
The report says Tokyo is facing a similar crisis as other international commercial centres such as London and New York experienced four years ago - an oversupply at a time of sudden changes in demand for office accommodation.
Richard Ellis projects the total stock of office space in Tokyo's 23 wards, or prime commercial districts, will increase some 18 per cent over the next three years to 42.98 million sq metres.
Overseas investment director David Runciman said this was expected to push vacancies to 17.74 per cent by the end of 1995, although rates were anticipated to vary tremendously between the different wards.
''Above average levels of new supply scheduled to be completed between now and 1995, combined with economic recession which is affecting business expansion plans and office take-up levels, will drive up vacancies,'' he said.
Meanwhile, rents are being driven down, with rates in older office buildings expected to eventually fall furthest.
Mr Runciman said rents initially declined more rapidly in newly completed quality buildings due primarily to landlords and owners trying to avoid triggering rent reductions in partly tenanted buildings.
''When space became available in these buildings, the trend has been for owners to adhere to unrealistically high asking rents to maintain the facade value for existing leases,'' he said.
''Or owners avoided actively marketing the office space and remained reticent in quoting any asking prices at all.'' Richard Ellis found owners of well located new large-floor buildings had so far stemmed the tide and held out from bargain-basement prices.
Between 1985 and last year the yearly average new supply of office space in Tokyo was about 1.6 million sq metres spread across the 23 wards, while the annual take-up during the same period was about 1.22 million sq metres.
Historical take-up levels absorbed most new supply, but turned to a downward trend from 1988 onwards after a record 1.69 million sq metres was absorbed by the market.
The supply-demand imbalance forced vacancy rates in the 23 wards to rise one per cent for the first time in 1990. Richard Ellis research shows they rose to 4.45 per cent in 1991 and averaged 8.8 per cent by the end of last year.
The Tokyo office market, standing at 36 million sq metres at the end of last year, is about 40 per cent larger than the total of Greater London and more than 80 per cent larger than the entire Hong Kong office market.
In contrast, New York, with a total estimated office space of about 40 million sq ft, is marginally larger than Tokyo's 23 wards.
Richard Ellis found while there was tremendous variation in the size of office stock, the overall population of these four cities was not as dissimilar.
