Why Japan's developers and investors have their sights set on mid-size office buildings

In a recent interview in the Mainichi Shibun’s Weekly Economist, the president of Ichigo Investment Advisors said that they found mid-sized office buildings to be advantageous during the slowdown in the office market.

What makes them resilient? From the Weekly Economist interview, it’s because these buildings are positioned in a sweet spot size and rent-wise where they attract tenants who have outgrown smaller buildings, and tenants who are looking to downsize from larger and more expensive office locations. The Ichigo Office Reit portfolio is operating at a 96.2% occupancy ratio for its office buildings as of February 2023, with the average office size per tenant at 270 sqm.  In April 2020 it had an occupancy ratio of 99.6%.

Mid-sized buildings tend to have a total floor area of between 500 ~ 3,000 tsubo (1,652 ~ 9,915 sqm), a lettable floor plate of around 100 ~ 150 tsubo (330 ~ 495 sqm), are usually around 8 ~ 10 stories, and have two elevators, according to Kenedix Office Investment Corporation. A 2013 survey by the Japan Building Owners and Managers Association, found that the average land size that a mid-size building occupies in Tokyo’s 23 wards is 935 sqm, vs. 355 sqm for a small-size building and 6,035 sqm for a large-size building. And, according to Kenedix, the standard tenant profile in these buildings is a small-to-mid-sized business with less than 30 employees. In Tokyo, 92.2% of offices have less than 30 employees. 

A survey by XYMAX found that there is an even split of floor space in mid-size and large-size office buildings in Tokyo, yet the average age of a mid-size building is 33.6 years vs. 24.9 years for a large-size building.

According to the Nikkei Business Publication, in early 2011 the average vacancy rate in a large-size building was 5.9% vs. 11.3% for a mid-size one. Since then, that gap has narrowed with the vacancy rate at the end of 2021 sitting at 3.5% for large-size buildings and 3.6% for mid-size ones. 

Japan’s top developers are starting to pay more attention to this space. Over the past few years, several high-end office brands have emerged, including PREX (Sumitomo Corporation), Bizcore (Nippon Steel Kowa Real Estate), PMO (Nomura Real Estate Development), REV20 (Chuo-Nittochi), and Business Cube (Taisei-Yuraku Real Estate).

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