Yoichi Kumagai is the associate director, head of research, at Cushman & Wakefield Japan.

By Yoichi Kumagai

Despite the magnitude of the Great East Japan Earthquake, physical and operational damage in Tokyo has been limited. However, the impact of the Fukushima 1 Nuclear Power Plant has had consequences on Tokyo, in a non-threatening manner, by way of the spread of radioactive materials and the possibility of rolling blackouts.

As the current situation does not seem to have deteriorated, most people and business entities are opting to stay in Tokyo because they still find a presence there attractive for tangibly and intangibly positive reasons. In response to the consequences, however, gradual change in the Tokyo office market is possible due to changes in tenants’ location criteria.

Four possible scenarios over a three-year horizon are presented below.

1. Business as usual

This scenario assumes that most people in Tokyo will forget about the Great East Japan Earthquake as soon as problems at the Fukushima 1 Nuclear Power Plant are mostly settled. Shortage of electricity is somewhat managed without drastic changes in lifestyle so businesses and people are not inconvenienced throughout the hot summer.

Some foreign-affiliated firms will move some of their operations out of Tokyo temporarily or permanently, but their impact is slight as the national share of such firms in terms of a number of business entities is only 0.2 percent.

Rather, foreigners have much more impact on the Tokyo office market as investors. They keep buying stocks as long as the price remains comparatively low, which helps many Japanese companies including J-REITs stabilize their balance sheets so they can continue their business operations at least for the short term. Overall, there is very little change in the Tokyo office market.

2. Narrow gentrification

Although people in Tokyo have become more sensitive about the disaster-resistant capacity of their offices in a broader sense, the capacity of Tokyo as a whole city is considered to be sufficient after all.

When choosing office locations, tenants commonly require at least buildings satisfying the anti-earthquake construction criteria in the 1981 version of the Building Standards Act. Some prefer broader disaster-resistant capabilities including factors such as compatibility with their business continuity plans, virtually flawless disaster records, stable lifelines, and employee accessibility. Offices in prime areas that satisfy the broader criteria are competitive.

The clear demand justifies investment to rebuild or retrofit old buildings in the area. Rent might increase in specific areas but not too significantly as demand does not exceed supply. On the other hand, offices not satisfying the 1981 standards and located in non-prime areas suffer from the gradual loss of tenants. This scenario suggests gentrification in narrow areas.

3. Partial spread

Many want to decentralize their business functions currently concentrated in the Tokyo region, in order to counteract possible future disasters beyond scientific and engineering assumptions. It is preferred to have backup business-continuity (especially decision-making) functions in a city on a different crustal plate from Tokyo.

For those who can afford such relocation, the potential destination would be a city with metropolitan infrastructure and accessibility to Tokyo. The Kansai region, including Osaka, Kyoto and Kobe, enjoys increasing demand for office space under this scenario. Also, as rolling blackouts continue due to excessive electricity use, firms decide to move their electrically-controlled facilities such as factories and data centers out of the area covered by the Tokyo Electric Power Company (TEPCO).

However, their main business operations remain in Tokyo because of the tenants’ unchanged preference to remain in the epicenter of government and financial activity with the large population base. Thus the relocation is partial without making a drastic change in the Tokyo office market. The partial spread of business entities is actually welcome because it activates the local economy.

4. True polycentricity

Tenants fundamentally reevaluate their criteria for office location in terms of disaster-resistant capacity with broader aspects. As a result, some large companies relocate their headquarters. Even after the reevaluation, Tokyo is still more attractive than many cities, thus the Tokyo office market does not drastically change.

Adding to the broader disaster-resistant capacity, such companies moving their headquarters consider overall public benefits of the destination city, including public-administrative capacity, livability, and potential industrial capability. Areas that have high marks in reevaluation attract new and long-term tenants followed by increasing investments for redevelopment.

Such areas may also be found in the resurrected Tohoku Region with improved public benefits and strengthened disaster-resistant capacity. Relocation of such business headquarters leads to gradual change towards true polycentricity.

Conclusion

Gradual change in the Tokyo office market is possible due to changes in tenants’ location selection criteria. True polycentricity requiring vast systemic change is not likely to happen in the near future. Similarly, the “business as usual” scenario after such a huge disaster is not likely, either.

The most probable future scenario ranges between “narrow gentrification” and “partial spread.” The decline of offices not satisfying the 1981 standards and located in non-prime areas is probable in any event. For such buildings to regain market attraction towards redevelopment, intervention of comprehensive and managerial policies is necessary.

As such policy intervention is not likely to happen in the next three years, the Tokyo office market focuses on the prime areas, especially those with the broader disaster-resistant capacity. It is possible that some companies will consider having back-up decision making functions in metropolitan areas on a different crustal plate from Tokyo. The most probable destination is the Kansai region including Osaka, Kyoto and Kobe.

Also, companies who want to assure stable supplies of electricity for their electrically-controlled facilities may move out of TEPCO coverage. Nevertheless, such relocations are likely to be partial and most will maintain their offices in Tokyo, making changes in the Tokyo office market gradual.

In the long run, though, true polycentricity shows a more encouraging future for resurrecting the Tohoku region. Extended diversity in choices of office location benefits tenants currently located in Tokyo.

Yoichi Kumagai is the associate director, head of research, at Cushman & Wakefield Japan.