Xymax Real Estate Institute

TOPIC REPORT

Deciphering Changes in the Office Market
Signs of change in emphasis on “near, new and large” office buildings

July 10, 2024

Introduction
In the office market, the preference for “near, new and large” office buildings has historically been afactor influencing a building’s competitiveness. “Near, new and large” refers to 1) the competitive locationof the building (near a train station), 2) the competitive age of the building (new), and 3) the competitive
size of the building (large). When it was assumed that employees would come to the office five days aweek, the general idea was that buildings with these three factors would attract greater demand and be
more competitive. However, following a major environmental change that was the COVID-19 pandemic,
many companies are now introducing hybrid work, involving working from the home or a satellite office,or changing/rethinking the usage and positioning of the office. This may have led to changes in the
traditional values that place importance on “near, new and large” office buildings. In this report, we identify
the trends of the office markets in the 23 wards of Tokyo before and after the pandemic in terms of eachof the “near, new and large” factors, analyze the backgrounds from both the supply and demand
perspectives, and examine the points that we believe are important in considering future changes in themarket.

Vacancy Rates by “Near, New and Large” Factors“Near”—Disparities based on the distance to the nearest station still exist—
Our first focus is on the “near” factor. Figure 1 shows vacancy rates by the number of minutes on footto the nearest train station in two categories: “within 5 minutes” and “more than 5 minutes.”

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institute
Figure 1: Vacancy Rates by Number of Minutes on Foot to Nearest Train Station
Within 5 minutes

More than 5 minutes

All 23 wards of Tokyo

10%

9%
8%
7%

6%
5%
4%
3%

2%
1%
0%

(Office buildings in the 23 wards of Tokyo (n=9,497))
When the vacancy rate of the entire 23 wards of Tokyo was high, the vacancy rate of buildings locatedmore than a 5-minute walk from the nearest station was high. However, as the vacancy rate declined,buildings far from stations were also selected, and their vacancy rate gradually approached that ofbuildings located within a 5-minute walk of the nearest station. As overall market vacancy rates rose after
the COVID pandemic ended, vacancy rates increased regardless of the number of minutes on foot to thestation. As overall market vacancy rates subsequently leveled off, the vacancy rate increased only forbuildings located more than a 5-minute walk from the station. Although it is currently on a downward
trend, it remains higher than that of buildings within a 5-minute walk. Based on these developments, we
can see that the advantage of a building based on its distance from the nearest station exists as it did
before the pandemic and has become apparent once again as vacancy rates in the overall market haveincreased.

“New”—Vacancy rate differences based on building age have narrowed—
We then focus on the “new” factor. Figure 2 shows vacancy rates by building age in two categories:“over 1 year old but not over 15 years old” and “over 15 years old.” This analysis excludes buildings thatare not over 1 year old, which have unstable occupancy.

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institute
Figure 2: Vacancy Rates by Building Age
Over 1 year old but not over 15 years old
9%8%Over 15 years old
All 23 wards of Tokyo

7%
6%
5%

4%
3%
2%

1%
0%

(Office buildings in the 23 wards of Tokyo (n=9,497))*Buildings 1 year old or younger are excluded as newly built buildings.
When comparing the vacancy rates of buildings over 1 year old but not over 15 years old to those over
15 years old, the vacancy rate of the former was consistently well below the vacancy rate of the latter prior
to the pandemic. However, as the overall market vacancy rates have leveled off or trended downward afterrising during the pandemic that began in 2020, the vacancy rate for buildings over 1 year old but not over
15 years old has increased to the same level as the vacancy rate for buildings over 15 years old. Currently,
there is no clear difference in vacancy rates. There may have been a change in the pre-pandemic trend of
relatively new buildings being filled in preference to older buildings.

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institute“Large” —Vacancy rate differences based on building size have narrowed—
Our final focus is on the “large” factor. Figure 3 shows vacancy rates by building size in three categories:
gross floor area (GFA) of “less than 1,000 tsubo,” “1,000 tsubo to less than 5,000 tsubo” and “5,000 tsubo
or more.” (1 tsubo = 3.33 sqm)
Figure 3: Vacancy Rates by Gross Floor Area

During the phase of falling vacancy rates through 2020, the smaller the building, the higher the vacancy
rate. However, the gap narrowed as vacancy rates began to fall across the entire market. This indicates aclear preference for large buildings prior to the COVID pandemic, where vacancies in buildings with larger
GFA were filled faster than other buildings, and vacancies in buildings with smaller GFA were filled later.
Looking at the trend since the end of the pandemic, following a rise in vacancy rates in all 23 wards ofTokyo, there is currently hardly any difference in vacancy rates between the different GFA groups, whichleads us to estimate that the difference in preference based on building size has diminished after the
pandemic.

Changes in the office market in recent years—Of “near, new and large,” the vacancy rate gaps based on “new” and “large” have changed—
So far, we have examined vacancy rates by category in relation to the three elements, “near, new andlarge.” As a result, we found changes in the pre-pandemic trends, in that while there was no change in thetrend that vacancy rates tended to be higher for buildings located farther from the nearest station, thevacancy rate gaps between the different categories in terms of building age and size have narrowed. In
particular, we no longer see the pre-pandemic tendency for vacancy rates to be lower in larger GFA

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institutecategories, suggesting a shift in the market structure. In the next chapter onward, we take a close look atwhat has happened in the office market in recent years from the perspective of both supply and demand,
which are the determinants of vacancy rates that represent a supply-demand gap, to explore changes inthe “near, new and large” values.

Office Market Trends from a Supply Perspective
An increasing number of large buildings in the 5 central wards
Figure 4 shows the trend of the office market from a supply perspective in terms of the total stock oflarge buildings (GFA of 5,000 tsubo or more) and small and medium buildings (GFA of less than 5,000
tsubo) in the 5 central wards and 18 peripheral wards.
Figure 4: Office Stock by Area and Building Size (Rentable Area Basis)

Looking at the office stock by area and building size since 1990, the stock of large buildings in the 5central wards increased in particular, reaching 5.33 million tsubo by the end of 2023. The stock of small
and medium buildings in the 5 central wards was the largest among the four categories in 1990, but it
peaked in 2011 and fell below large buildings in the 5 central wards in 2015, declining to 4.47 million tsubo
by the end of 2023. The stock of large buildings also gradually increased in the 18 peripheral wards,
surpassing the stock of small and medium buildings in 2018. These developments suggest that large
buildings have become commoditized in the office market in recent years, as supply has increased primarily
in large buildings in the 5 central wards, resulting in intensified competition among large buildings.

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institute
Mixed-use buildings increasing among large buildings in the 5 central wards
Figure 5 shows the trend of the stock of large buildings in the 5 central wards categorized into singlepurpose office buildings and mixed-use (commercial, hotel, residential, etc.) buildings.
Figure 5: Stock of Large Buildings in 5 Central Wards:
Single-purpose Office Buildings and Mixed-use Buildings – By Gross Floor Area

(milliontsubo)

Single-purpose office buildings

Mixed-use buildings

4.0

3.5
3.0
2.5

2.0
1.5

1.0
0.5
0.0

(Buildings in 5 central wards with GFA of 5,000 tsubo or more that include
office use (n=657))
Looking at the trend of the stock of single-purpose and mixed-use buildings, we can see that the stockof mixed-use buildings has been increasing continuously, while the stock of single-purpose office buildings
peaked in 2005 and declined to 1.56 million tsubo by the end of 2023, less than half the stock of mixeduse buildings. Mixed-use buildings include buildings with small shops on the first floor, but in recent years,
there has been an increase in large buildings that also accommodate other purposes, such as shopping
venues, hotels, and residences, in the 5 central wards. In addition to mixed-use buildings, there has been
an increase in buildings with amenities such as meeting booths and refreshment areas in the common
areas, suggesting that developments with unique features that go beyond simply providing office space
are becoming mainstream.

Supply-side trends
From the above, we can see that the supply side in recent years has focused on large buildings, especiallymixed-use buildings, in the 5 central wards.
The background to this is the simplification of urban planning procedures through the National StrategicSpecial Zone system established in 2013 and the relaxation of the floor-area ratio for hotel and residential

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Instituteuse in central Tokyo, which encouraged the construction of mixed-use buildings in central Tokyo. If thesepolicies continue, it is likely that future new supply will be centered on the development of mixed-use officebuildings based on these policies. On the other hand, the labor shortage in the construction sector, also
known as the “2024 problem,” and the recent surge in the price of construction materials have caused
construction projects to be delayed or reconsidered. Add to this the possibility of a rise in interest rates,
and future new supply could be reduced, depending on the situation.

Office Market Trends from a Demand Perspective
Downsizing of office prominent among large companies during the pandemic
Next, we use the “Metropolitan Areas Office Demand Survey Autumn” conducted by Xymax Real Estate
Institute (“Xymax REI”) to examine demand-side developments before and after the pandemic. Figure 6
shows the percentage of office area expansion or downsizing between one year prior to each year’s survey
and the time of the survey, and the DI, which is the percentage of expansion minus the percentage ofdownsizing, for the total sample of the analysis and for large companies (i.e., 1,000 or more employees). In
this analysis, responses from companies located in the 23 wards of Tokyo whose office type is head office,sub-office, branch office, or sales office were extracted and analyzed.
Figure 6: Percentage of Office Area Expansion/Downsizing and DI – By Company Size

Looking at the total sample, the DI was positive until 2019 but fell to 0 in 2020 and then to negative
territory in 2021 and 2022. This is likely due to office downsizing associated with restrictions on coming tothe office during the pandemic. Office expansion again outweighed downsizing in 2023. Compared to thetotal sample, large companies had larger negative DIs in 2021 and 2022, suggesting that their officedownsizing during the pandemic was more pronounced. On the other hand, the DI was -1 in the 2023
survey, a decrease in the difference between expansion and downsizing and similar to the result of the

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institutetotal sample. This suggests that office reorganization after the pandemic is not biased toward downsizing,even among large companies.

Office downsizing prominent among parcels of 300 tsubo or moreOf the relocation information collected independently by Xymax REI between 2017 and 2023, we
extracted those where the pre-relocation area and relocation details were known. Figure 7 shows thepercentage of relocation & expansion/floor expansion and termination/downsizing for the total sample
and for relocations where the pre-relocation area was 300 tsubo or more.
Figure 7: Percentage of Office Area Expansion/Downsizing and DI – By Parcel Size

In terms of the total sample, the percentage of relocation & expansion/floor expansion was high until
2019, with the DI in positive territory. However, the percentage of termination/downsizing increased
significantly in 2020, when vacancy rates rose due to the pandemic, exceeding the percentage of relocation& expansion/floor expansion by 21 percentage points. Subsequently, the percentage oftermination/downsizing gradually declined, with the DI returning to positive territory in 2022. In 2023, thepercentage of relocation & expansion/floor expansion exceeded that of termination/downsizing by 15
percentage points.
Meanwhile, when we narrow down to relocations where the pre-relocation area is 300 tsubo or more,
the DI was positive until 2019, but the percentage of termination/downsizing exceeded 60% in 2020, withTOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institutethe DI at -53. While the gap has gradually narrowed thereafter, the DI remains at -22 in 2023.

Demand-side trends
Looking at the trend of office expansion and downsizing from the demand side, office downsizing during
the COVID pandemic was more prominent among large companies and tenant companies occupying large
parcels.
Possible factors include large companies being more proactive in changing employee work styles, forexample by introducing hybrid work, and the greater scope for rethinking the office in large parcels thanin small ones, resulting in a greater effect of reducing fixed costs when downsizing. This may have led to a
decline in demand for large parcels and thus a decline in demand for large buildings.
Meanwhile, amid moves to return to the office and create offices that employees want to come to in
preparation for the end of the pandemic, the difference between expansion and downsizing has narrowed
even among large companies. In considering future office demand, it is worth paying attention to how
work styles and the use of the office will change in companies.

Key Points in Predicting the Market Going Forward
Thus far, we have identified the changes in the office market before and after the COVID pandemic,
focusing on the “near, new and large” elements, and analyzed the factors behind the changes from both asupply and demand perspective. The vacancy rate trends show that the difference in vacancy rates between“new” and “large” buildings and other buildings has narrowed compared to before the pandemic. In
particular, for the “large” element, the pre-pandemic tendency for larger buildings to have lower vacancy
rates has disappeared. A likely factor is a decline in the advantage of large buildings due to, on the supply
side, an increase in the stock of large buildings in central Tokyo, especially mixed-use buildings that include
retail stores and hotels, resulting in intensified competition among large buildings, and, on the demandside, active office downsizing during the pandemic, especially among large companies and large parcels.
We have analyzed recent trends as the above, but further changes on both the supply and demand sides
are expected in the future. In this chapter, we will list the points that are considered important in predicting
the future of the market.

Key points from the supply perspective
Rent and parcel adjustments in large buildings
Although the difference in vacancy rates by building size has disappeared, rents for large buildings
remain higher than for small and medium buildings. Furthermore, large building parcels can be subdivided
to accommodate the need for small and medium parcels. If large buildings begin to absorb the need forsmall and medium parcels through rent adjustments or parcel segmentation, large buildings may regain
an advantage, resulting in a decline in the vacancy rate of large buildings as before the pandemic.
Impact of higher construction costs on new supply
Supported by the National Strategic Special Zone system, among others, there has been a noticeably
large supply of buildings in central Tokyo. Recently, however, the labor shortage in the construction sector,
also known as the “2024 problem,” and the soaring price of construction materials have led to delays in

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate Institutethe completion of construction and reconsideration of construction plans. If supply becomes constrained,
new large buildings may become increasingly scarce.
Generalization of new added values of office buildings
In this report, we showed that the number of mixed-use large buildings is increasing in central Tokyo.
The quality of office buildings has been changing not only by becoming mixed-use but also by
incorporating new added values into buildings, such as “environmental performance” to addresscompanies’ sustainability requirements; “smart buildings” that incorporate IoT and AI to provide highconvenience, security, and energy efficiency; and “ample amenities and common areas” to make offices anattractive place for employees to come to work. Going forward, being equipped with these new added
values may become a common, important indicator for measuring the competitiveness of offices.
Renovation of old buildings
With construction costs soaring, there has been an increase in renovations rather than reconstruction asa way to enhance the value of office buildings. Older buildings are also undergoing upgrades of common
areas and renovations to meet the demand for set-up offices. Going forward, an increase in buildings withvarious added values, regardless of their building age, may weaken the focus on “new” buildings.

Key points from the demand perspective
Changes in work style
The COVID pandemic has led to the proliferation of hybrid work in many companies, which combines
working in the main office with teleworking. Following the reclassification of COVID-19 as a Class 5
infectious disease, different companies have adopted different policies concerning the ratio of teleworking
and coming to the office. The development of the office market may be influenced by how work styles
change within the companies.
Diversification of functions required in offices
With the proliferation of hybrid work, coming to the office every day is no longer a given, and web
meetings and remote work have become the norm. To increase the organization’s productivity under thesecircumstances, companies have set up private rooms for web meetings and spaces to facilitate smoothcommunication. It is likely that the functions tenant companies require in offices will become more diverse.
Diversification of added value required in buildings
In the section on the supply side, we mentioned that there has been an increase in buildings with new
added values such as “environmental performance.” We also believe that demand-side added value
requirements for office buildings will become more diverse. With changes in work styles within companies
and in companies’ requirements of functions in offices, it is also expected that more companies will choosebuildings based on values other than the traditional “near, new and large,” such as “environmental
performance” and “ample amenities and common areas.”

Conclusion
TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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TOPIC REPORT｜Xymax Real Estate InstituteIn light of past office market trends and the future supply and demand key points we have presented inthis report, it is likely that the future office market will experience a shift away from traditional values thatplaced importance on being “near, new and large” and will experience greater diversification andcomplexity from both a supply and demand perspective.
Going forward, the supply side will need to further consider the type of added value it should add tooffice buildings in order to differentiate in the face of ample existing stock and potentially greater
constraints on new supply due to soaring construction costs. It is also likely that there will be more
opportunities for buildings that have not been highly rated based on traditional values to be highly rated
by adding new value.
The demand side is likely to be more inclined to consider the work style that suits the company and thetype of office it should choose to achieve it, in addition to the traditional way of rating buildings, i.e.,
whether the building is well located, new and prominent.
Xymax REI will continue to provide useful information by anticipating market changes through researchon the changes in office market trends and office stock, and the types of offices required by the demandside.

For further inquiries please contact below:
Xymax Real Estate Institutehttps://soken.xymax.co.jp | E-MAIL: info-rei@xymax.co.jp

TOPIC REPORT: Deciphering Changes in the Office Market
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2024 Xymax Real Estate Institute Corporation. All rights reserved.

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