Office Market Dynamics and Drivers of Inefficiencies: Evidence from Tokyo Office Market

Abstract

The office market is one of the most inefficient real estate markets, and it takes time to adjust. Factors of it include high transaction costs, constraints due to long-term contracts, and time delays in supply. Research on the adjustment mechanism in real estate markets has been accumulated over many years, mainly in Europe and the United States. In recent years, research has been conducted in developing countries. However, the main focus of these studies has been on the market's response to demand and supply shocks and the speed of rent adjustment, and there have been few studies on the factors that cause market inefficiencies and their effects. In addition, although the Tokyo office market forms one of the largest markets in the world and attracts a great deal of attention worldwide as a target for investment, there have been very few academic studies on the dynamics. This study aims to quantitatively clarify the dynamics of the Tokyo office market from 2000 to 2015 and the factors that cause market inefficiencies. We applied the rent adjustment process model devised by Englund et al. (2008), which considers the interaction between rents, stock, and vacancy rates, to data divided into four submarkets according to building size, and discussed the results in combination with the differences in market characteristics by submarkets. Our result shows long-term contracts and supply constraints contribute to market inefficiencies more than information asymmetry. By comparing the results with those of other countries, it became clear that Japan's unique contract system with fewer restrictions on the tenant side - the standard tenancy contract - speeds up the market adjustment. In addition, the results imply that the Tokyo office market may still have issues in terms of information asymmetry and low liquidity in the labor market.