Office Investment Market Becoming More Selective -Selection of the Winning Market in Tokyo\u27s 23 Wards

Following the collapse of the economic bubble in 1991, Japan’s economic growth has slowed down. In particular, with respect to the office market, it has suffered high vacancy rates and there have been many cases where office buildings have had to be rebuilt. This trend is predicted to further increase in the midst of a precipitous decline in the size of the working-age population. When undertaking an office investment under such circumstances, it will be essential to select an investment property and the area (in which such property is located) carefully. The purposes of this paper were to extract the signals used to determine the market selection with respect to an office investment, and to make apparent areas that will, going forward, continue to maintain strong fundamentals (potential value) in the office investment market. In regards to area selection, this paper focused on the phenomenon where, following the collapse of the economic bubble, many office buildings had to be put to different uses out of necessity.This paper also focused on the changes in real estate investment returns and building use by area. Specifically, factors affecting changes in building use were extracted by applying a panel random probit model on the 3,134 areas surveyed under the national census from 1991, when the collapse of the real estate bubble began and onward. Further, based on the factors that were extracted per the above, areas that have strong survival rates as office markets were selected. As a result of estimating the panel random probit model, which focused on the changes in building use, it has been found that the conversion from office use to residential use has been largely brought about by the index which measures the extent of excess in rents when a building is converted to residential use as opposed to using it as an office building. This finding conformed to the result that was indicated in a series of analyses that began with Wheaton (1982) as follows: “return differentials effect land use conversions.” Moreover, 303 areas predicted to have strong fundamentals for office investments have been extracted using the ratio of office rents to residential rents. These analyses have been conducted with respect to Tokyo, which is a region that has extremely weak land use regulations. As such, there are limitations to applying these analyses to cities that have stricter land use regulations that make it difficult to commence construction or rebuild in such cities. Nonetheless, as analyses of the Tokyo office market, where population decline and aging are progressing at the fastest rate, are being conducted ahead of other major developed countries, it is thought that such analyses will serve as an important guide for many cities, starting with European cities, that will be facing similar situations going forward