In Japan, Economic Change
Propels Big-City Prices
Shift Toward Services Puts
Premium on Urban Land;
Rural Areas Keep Sagging
By ANDREW MORSE
March 28, 2007; Page B6
TOKYO -- To see why Japanese land prices have begun to rise for the first time in 16 years, take a look at Tokyo Midtown, a swank office-and-hotel development in central Tokyo that is scheduled to open on Friday.
The $3.4 billion development, which includes a 54-story glass-and-steel structure that is Tokyo's tallest building, has already rented out all its office space, drawing on Japanese companies looking for bigger offices to accommodate staffs that are growing as the economy improves. Fujifilm Holdings Corp. and Konami Corp., a videogame maker, are moving their headquarters to the new complex. Internet company Yahoo Japan Corp. is renting additional space in the complex while maintaining its headquarters in a nearby high-rise.
"We'd been looking for a place that could handle our needs for several years," says Akie Kikuchi, a spokeswoman for Yahoo Japan, which has rented 10 floors in the Tokyo Midtown development. "Our staffing has quadrupled over the past three years." The company employs nearly 2,300 people.
Upscale boutiques, including an Issey Miyake Pleats Please shop, have scooped up the development's marquee retail space. Occupying the top nine floors: Tokyo's first Ritz-Carlton luxury hotel.
Such keen demand for commercial space in Japan is a big reason that property prices nationwide posted their first general rise in 16 years, according to a government survey released last week. The economy's continued growth is leading to a sixth consecutive year of earnings increases for many Japanese companies. Many are adding staff to keep their businesses expanding. Rising prospects for employment, in turn, have prompted individuals to start looking for homes, pushing up the value of residential properties.
Overall, commercial land prices jumped 2.3% last year, while residential land prices rose 0.1%. Despite Tokyo's building boom -- 92 skyscrapers under construction, according to German data tracker Emporis GmbH -- the supply of premium-grade office space can't keep up with demand from growing companies. The average vacancy rate in Tokyo's main business districts was 2.9% in December 2006, down from 4.2% in December 2005 and 6.1% in December 2004, according to Miki Shoji Co., a real-estate consultancy.
The land-price gains were most pronounced in Japan's big cities -- Tokyo, Osaka and Nagoya. The value of some properties, such as a plot of land near the Tadao Ando-designed Omotesando Hills shopping complex in a fashionable Tokyo neighborhood, jumped more than 45%. Heavily trafficked properties near major railroad stations in Nagoya in central Japan and Hakata in southern Japan chalked up rises of more than 40%, as did four residential properties in elegant Tokyo neighborhoods.
While property values are rising in major cities, prices in rural areas -- where about half of Japan's 127 million people live -- are still falling, though slower than before. Commercial land prices outside big cities fell an average of 2.8% last year, after dropping 5.5% a year earlier. Residential prices dropped 2.7% last year after falling 4.2% the previous year.
Seasoned property investors say the two trends -- rising prices in the cities and slumping prices in the country -- are tightly connected. Japan is shifting from a manufacturing economy to a service economy. Some companies are moving manufacturing facilities overseas to take advantage of lower wages in places such as China and India, or to get closer to their customers -- Japanese car makers have opened factories throughout the U.S.
But those same companies still keep their marketing and finance functions in Japan. That means less demand for big plots of land outside major cities, where factories are usually located, and more demand for offices in city centers that are close to advertising agencies, accountancies and investment banks. The upshot: Land prices in Japanese cities are likely to continue rising, while they slip in the countryside.
"Japan is changing into a much more concentrated service economy," says Osamu Kaneko, president of KK DaVinci Advisors, a real-estate investment company that manages about $9 billion in Japanese properties. "As far as Tokyo is concerned, I'm very bullish," he says. "But I'm not very optimistic about the rest of Japan."
Few places exemplify the economic transition more completely than Tokyo Midtown. The project, built on the former site of the Japan Defense Agency headquarters, was developed by Japan's biggest real-estate developer, Mitsui Fudosan Co., and five other companies. Almost all of the major tenants are in service businesses, including State Street Corp., a bank, and Nikko Asset Management Co., a mutual-fund company. A clinic affiliated with Johns Hopkins University is also located in the complex.
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