Flexible space in Tokyo CBD continues to expand as operators are launching new locations and demand picks up. Growing momentum in demand is due to the Work Style Reform enacted in April 2019, particularly for community-oriented locations. By the end of 2020, it is expected that the total net leased area of flexible space in Tokyo CBD will expand to approximately 390,000 sqm, or become more than twice the market size two years previously. Nevertheless, flexible space still only accounts for a relatively small share of the traditional office market in Tokyo (less than 1% of grade A stock) and lags behind penetration in more mature flexible space markets of New York City (4%) and London (3%).
On the demand side, large corporates are signing license agreements for full floors and buildings that are managed by flexible space operators. Moreover, several companies are using flexible space to set up their headquarters or their subsidiaries’ headquarters. Firms are increasingly looking at flexible work environments as a way to optimize their real estate portfolios.
As a result, community-oriented shared offices now operate in more than 73 locations, or roughly 155,500 sqm (Figure 1), in Tokyo CBD, exceeding the total leased area of serviced offices. More than half of the new supply of flexible spaces that opened in the Tokyo CBD in 2019 had a communal aspect with common lounges and free-address seats.
Traditional flexible space operators including Regus and others are also expanding or launching new operations. In April 2019, the largest local conference room operator TKP acquired Regus Japan, the largest serviced office operator, and have been adding new locations, some of which are full buildings and much larger in scale than existing .
Major domestic developers including Mitsubishi Estate, Mitsui Fudosan, Tokyu Fudosan, Nittochi Tatemono, and Xymax are launching co-working operations and serviced offices. For instance, the flexible space brands Human First Time (Nomura Fudosan) and Circles (Mitsubishi Estate) are expected to launch new series in 2020 and open locations (in some cases, at least 10-15 new sites) within the next 5 years. A significant amount of this new supply is community-oriented and this trend is expected to continue for the foreseeable future as flexibility is more in focus.
Another aspect of flexible space expansion is the proliferation of satellite offices among large corporates to improve work-life balance and productivity. The Work Style Reform Act is driving more firms to turn to satellite offices to enable employees to work remotely and more closely to home, or close to external meetings and conferences, as well as major public transportation nodes such as express train terminals. Also, employees with young children are encouraged to use satellite offices located close to home approximately 2-3 times a week.
Despite the recent withdrawal of the WeWork IPO in September, the long-term outlook for the flexible space industry in Tokyo remains robust. Currently, operators are facing the decision to expand at high rental levels or to look beyond office space for options. In any case, the flexible space industry in Tokyo CBD is shifting from an early stage to growth phase.
Figure 1: Serviced vs Co-working Offices in Tokyo CBD
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