Spillover Effect of Large Building Construction on Neighborhood Office Rents

Abstract

The impact of newly constructed buildings on local property markets can be explained by tradeoffs between the supply effect, absorbing demand and reducing rents, and the amenity effect, attracting new amenities and increasing rent. While scholars are increasingly discussing the effects of this tradeoff, particularly in the residential market, work on the office market—a major component of urban areas—is scarce. This study aims to identify these tradeoffs in the Tokyo office market using two identification strategies based on an event study plot. The results indicate a strong spillover of supply effects to lower-tier office buildings. However, in suburban areas, new supply was found to decrease rents for medium-sized office buildings while increasing rents for small ones. In all cases, similarly sized office buildings near the new buildings were not significantly affected. These findings suggest that new supply leads to a filtering process and gentrification and, moreover, that these effects depend on location and size. Furthermore, the results suggest that the new Tokyo supply stimulates latent demand. Such an effect may be unique to a market in which vacancies are low and development is thriving. Our findings are important for investors seeking to understand urban dynamics and optimize their portfolios.

Keywords:

• Office building supply
• amenity effect
• supply effect
• filtering process
• gentrification

Acknowledgments

We would like to thank the Sanko Office Foundation, the Obayashi Foundation, and the Japan Society for the Promotion of Science (JSPS) for their financial support.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 “tsubo” is a unit of land measurement unique to Japan, with one tsubo representing ∼3.30579 m².

2 The CBD in Tokyo represents the five central wards consisting of Chiyoda, Chuo, Minato, Shibuya, and Shinjuku wards (Kawai et al., 2019).

3 Although the target areas shown in Figure 5 precisely include some areas within the CBD, these areas are not office-dominated cities, but rather retail-dominated cities, and are identical to those outside the CBD. It should be noted that the region is sufficiently prosperous as a city compared to a typical suburb.

Additional information

Funding

This work was supported by the Sanko Office Foundation, the Obayashi Foundation, and the JSPS KAKENHI [grant number JP23KJ0242].