(7) Sumitomo’s “Inconvenient Truth” on their Empty Office Buildings

Seeing is Believing!
Here’s the reality in our neighborhood!

Pandemic Changed Office Demand in Tokyo

A state of Global Pandemic appears to finally be over in Japan. Students are back in school, foreign visitors have returned, and retail stores are doing better. While everything seems to look just like it did before the pandemic, there is one sector that is still struggling. Or, more precisely speaking…”getting even worse”.

This is the Office Market Sector, the sector in which SUMITOMO Realty and Development Co., Ltd., is heavily involved.

How Bad is Tokyo’s Office Market?

Post-pandemic, people are simply not returning to their offices, and tenants are downsizing their office space accordingly.

There is simply not enough demand for office space, but the worst is yet to come. Why? It’s because many leases signed before the pandemic have long contract periods, so that renewal dates have not yet arrived.

The NIKKEI (Nihon Keizai Shinbun) newspaper dated Aug 11^th, reported that the Office Vacancy Rate in Central Tokyo area reached 6.46% in July. While the industry traditionally considers “5% vacancy” as a “break-even point” for checking market soundness, NIKKEI reported that the vacancy rates have exceeded this “5% level” for 30 consecutive months. That is 2-1/2 years in a row! Things are even worse for new buildings. NIKKEI further went on to report that when it comes to the newly built office buildings (i.e, buildings completed within one year), its vacancy rate has reached as high as 34.42% in July.

These statistics clearly indicate that the Tokyo office market is currently in chaos, and we can easily imagine that many real estate developers and building owners are struggling to make ends meet with empty office spaces.

SUMITOMO Realty and Development Co., Ltd., being a “developer” of office buildings as well as an “office space owner,” is no exception.

Can Sumitomo Survive with “60% Vacancy”?

While vacancy rate for new office buildings in Tokyo is 34.42%,

SUMITOMO’s 60% or even higher vacancy that we observed in our neighborhood definitely stands out in the market.

Local residents in Sengakuji area are starting to worry about SUMITOMO’s high vacancy, because they are currently under SUMITOMO’s URBAN REDEVELOPMENT SCHEME, where a new office building is being planned at landowner’s business risk（i.e, not SUMITOMO’s risk）.

The Reality of Sumitomo’s Office Buildings

Below is our observation of SUMITOMO’s new office buildings located in our Sengakuji neighborhood, one of the prime business districts in the center of Tokyo. Please first take a look at the photo images on top of this article.

This is a brand new 42-story office building constructed as part of a local SUMITOMO redevelopment project.

Despite the lapse of almost 6 months since its completion, SUMITOMO has attracted only 3 key tenants occupying a total of 11 floors so far. Realtor’s website shows 25 floors are still on the market “FOR RENT”.

Current vacancy rate seems to be 60% or higher.

Meanwhile, we found out that one of the 3 key tenants, who occupied 3 floors in the new building, merely moved in from another SUMITOMO building located next-door. (see the photo image)

The move apparently helped SUMITOMO improve the occupancy rate at the new building, but it also resulted in vacancy at the old building as well. As you can see from the photo image, there seem to be some vacant floors in the old building.

If this tenant had remained in the old SUMITOMO building,

the vacancy rate of the new building would have reached 70%!

This is another 19-story office building constructed in our neighborhood. This building was completed in January, 2022.

However, for some reason (no tenant?) it had been closed for nearly one year until it finally opened.

The photo image shows the building on weekday evening at dusk.

As you can see, almost the entire building still looks vacant.

According to realtor’s website, 13 floors are still on the market “FOR RENT”.

Current vacancy rate seems to be 70% or higher.

There is another “not-so-good” story behind this SUMITOMO project.

This building, “SUMITOMO Osaki Twin Bldg., East”, is a twin tower, and its counterpart building is now under construction just across the street. Can SUMITOMO attract enough number of tenants when it constructs another office building in the area where demand is little?

Summary

It seems the pandemic totally changed the landscape of Tokyo’s office market. People are simply not returning to office like before, and tenants are downsizing their office space accordingly.

While the vacancy rate for the new office buildings in Tokyo is 34.42%, SUMITOMO’s office vacancy stands out at 60% or even higher level in our neighborhood, one of prime location in central Tokyo. Despite such business environment, SUMITOMO seems intent to construct another high-rise office building in our local town in Sengakuji at landowner’s risk.

SUMITOMO should realize that their past performance does not necessarily guarantee future results, especially in the post-pandemic world.

In the 1989 movie, “Field of Dreams,” Ray (Kevin Costner) heard a heavenly voice saying, “If you build, he will come,” so he built a baseball field in the middle of his cornfield in Iowa and became successful. Unfortunately, the same story will not likely happen for SUMITOMO.