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WeWork emerges as a major force in Tokyo's sizzling office market

Shared workspace provider helps fuel biggest real estate boom since bubble years

In just 10 months, WeWork has become a major player in Tokyo's shared workspace market.   © Reuters

TOKYO -- Shared workspace provider WeWork is shaping up as a powerful force in Tokyo's office real estate market, which is basking in its biggest boom since the bubble years of the early 1990s.

The fast-growing American startup, noted for its sleek, stylish workspaces, has been expanding rapidly in Tokyo's prime business districts since entering the market in February, as the office vacancy rate in the capital hits its lowest level in decades.

WeWork's aggressive strategy in Japan, which the company views as a growth market, is adding fuel to Tokyo's already hot property market.

In just eight years since its founding in 2010, WeWork has expanded into a global presence, becoming the largest supplier of office space in New York and London.

The New York-headquartered company is not just a shared workspace. It also encourages occupants to network with each other to build business relationships -- a model that has been the driving force behind its breakneck expansion.

Since its foray into Japan, WeWork has opened 11 locations nationwide in just 10 months, and plans to increase this number to around 30 by the end of 2019.

WeWork has triggered a seismic shift in central Tokyo's office market. A midsize building in Minato Ward, where WeWork opened another location earlier this month, saw its price shoot up more than 50% in six months. Goldman Sachs, which purchased the property, is said to have done so due to the presence of WeWork.

This property was originally sold by clothing company Sanyo Shokai to GreenOak Real Estate, a U.S. investment management company, for slightly over 6 billion yen ($53 million) in April. Goldman later snapped it up through an affiliated real estate fund for over 10 billion yen in early December.

WeWork outfitted its latest branch with desks and chairs in various sizes, and provides coffee with unlimited refills and craft beer on tap.

WeWork's most recent location is housed in a building owned by a real estate fund affiliated with Goldman Sachs.

WeWork charges more than other shared workspaces -- sometimes more than double -- but is confident that it can fill its locations. Leases for its branches are generally long, often exceeding 10 years. Goldman shares WeWork's optimism, viewing the company a source of steady, long-term revenue that justifies the high price it paid for the building.

It is not just Goldman that sees WeWork as a reliable revenue stream. Norway's sovereign fund, Government Pension Fund Global, partnered with Tokyu Fudosan Holdings to purchase five commercial buildings in Tokyo's trendy Omotensado and Harajuku districts, a move driven in part by WeWork's plan to lease one of the buildings. The December 2017 deal cost 132.5 billion yen.

Vacancies for office buildings in the five central Tokyo wards of Chiyoda, Chuo, Minato, Shinjuku and Shibuya slid to 1.98% in November, marking the first reading below 2% since 1991, according to brokerage Miki Shoji. WeWork is on track to operate eight locations in the five wards by the end of this month, managing 40,000 sq. meters of Tokyo office space, according to JLL.

In less than a year, the U.S. startup is rivaling the sector's largest player, IWG, formerly Regus.

The owners of buildings where WeWork resides include big-name foreign funds such as Elliott Management of the U.S. and domestic real estate companies like Mitsubishi Estate.

WeWork typically chooses large spaces in upscale properties for its locations, securing long-term leases for multiple floors in high-rise buildings, or leasing entire buildings near major train stations. This policy has drawn keen attention from both domestic and foreign investors.

A WeWork office in Tokyo

The company's rapid expansion has been helped along by SoftBank Group via its $100 billion Vision Fund. The Japanese conglomerate has already poured nearly 1 trillion yen into WeWork, partnering closely with the U.S. company in Japan. SoftBank Chairman and President Masayoshi Son said WeWork will eventually be one of the group's core companies.

SoftBank is showing increasing interest in the property business, with its Vision Fund pouring capital into a number of real estate startups, including OpenDoor, which sells secondhand properties, and Compass, a broker specializing in high-end real estate.

But it is unclear how long Tokyo's office real estate boom will last, an uncertainty that will shadow WeWork's bottom line. In a worrying sign, WeWork posted an EBITDA -- earnings before interest, taxes, depreciation and amortization -- loss of $168 million for the July-September quarter, a figure attributed to heavy upfront investment.

And despite its confident outlook, should WeWork fail to keep its shared workspaces filled, membership fees might not cover rents.

Office building prices in Japan have already climbed to their highest levels since 2008. WeWork's impressive expansion drive could start to fizzle once the real estate sizzle evaporates, said one observer.

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