TOKYO -- Office rents in Nagoya have edged closer than ever before to those in larger Osaka and may surpass them in a few years as redevelopment projects transform Japan's fourth-largest city.
The difference between average asking monthly rents on centrally located properties in the two cities narrowed to a record-low 324 yen ($2.63) per 3.3 sq. meters at the end of October, according to Miki Shoji, a Tokyo-based real estate agency.
Osaka office rents were nearly 5,000 yen higher on average in the mid-1990s.
As of Oct. 31, central Nagoya office space averaged 10,798 yen per 3.3 sq. meters (or one tsubo, an old unit of measurement), up 47 yen from the start of the year.
Nagoya ranks behind Tokyo, Yokohama and Osaka in population and forms the heart of one of the country's three great metropolitan areas.
A number of construction projects around Nagoya Station have finished in the past two weeks or are underway. The just-completed JP Tower Nagoya, which occupies the site of a former post office, has already achieved an impressive 70% occupancy rate. The newly rebuilt Dainagoya Building is almost completely booked.
Demand for office space will remain brisk, predicted the head of real estate broker Sanko Estate's local branch.
Central Japan Railway expects to open a magnetic-levitation train line between Tokyo and Nagoya in 2027. Many office tenants around Nagoya Station are expected to move as the railroad acquires land for this massive undertaking. People familiar with the market estimate that about 100 companies occupy a total of 33,000 sq. meters of office space in the path of the project. The resulting relocations will likely push rents even higher.
Hard times in the Big O
Average rents fell in most Japanese cities after the 2008 global financial crisis, but Osaka saw a particularly steep drop. Nagoya has made a faster recovery. Rents were down 2.9% on average in October compared with five years ago. In Osaka, they were down 8.9%.
Centrally located Osaka office space fetched 11,122 yen per 3.3 sq. meters on average, 15 yen less than at the start of 2015. Grand Front Osaka, a multiuse complex completed in 2013, has yet to reach full occupancy -- just one indication of the depth of the slump.
"The city's traditionally vibrant textile industry is in a downturn, so corporate demand is sluggish," an office real estate broker said.
Another factor is a trend toward companies moving out of leased offices into custom-made digs. Some small and midsize office buildings are being converted into hotels or apartments, according to the Xymax Real Estate Institute in Tokyo.
But "there's a persistent stereotype among managers at companies with nationwide operations that rents are higher in Osaka than Nagoya," a broker said. To an extent, this thinking slows rent appreciation in the smaller of the two cities.
Meanwhile, Tokyo's office market remains on a roll. Rents in the capital's five central wards -- Chiyoda, Chuo, Minato, Shinjuku and Shibuya -- averaged 17,612 yen per 3.3 sq. meters in October, up 18 yen from the previous month, according to Miki Shoji. This marks the 22nd straight month of gains. Rents are up 8.7% compared with the end of 2013, the low-water mark in the past five years.
Sumitomo Realty & Development said it has been able to raise rents for at least half of tenants renewing their leases.
The completion of the new Tekko Building in Chiyoda Ward at the end of October did not push up the overall office vacancy rate.
"The strength of demand is greater than we had expected," said Toyokazu Imazeki, chief analyst at Sanko Estate.