While office vacancy has increased, B grade office investments have been seen.
Now a days, under the pandemic caused by COVID-19, more and more companies have been implementing remote works. Therefore, tenants ‘reducing their office premises or large scale cancellations have been seen in the market. On the investment side, majority of investors are look at residential assets and intend to dispose offices whose age has been getting relatively old, with the possibility of tenants’ leaving and becoming less marketable.
On the other hand, several investors, not only domestic but also international have been investing into B grade offices in B locations in central Tokyo/major cities.
B grade means relatively small, in total 2000-3000 sqm of gross area, with 10-15 years of building age and B location means the area which is not considered as the top office destination but close to stations, with good access to public transportation, or surrounding areas of A offices.
We have analyzed that the reasons for this trend are as follows:
1 Reduced price
2 Conversion possibility
3 Redevelopment opportunity
4 Prospects for site assembling
1 Reduced price
Presumably, for relatively small office assets, now the cash flows have been deteriorating and the buyer’s bargaining power has got strong compared to before COVID. Even though we can’t expect a sort of huge discount, we would be able to have the decent price range, say 4-6% of net base, for the B grade office assets, which demonstrate obvious risk of vacancy.
Given the opportunities demonstrated in this articles, some investors who can bear with the relatively high vacancy, reduced cash inflow, and can afford to spend some more investment for future renovation, have been interested in buying such assets.
2 Conversion possibility
Automation, implementing remote work facilities, updating broad band environments, and flexibility of separation/ integration of office spaces, all those arrangements would be easily made on relatively small offices than on large scale ones. We will experience a transition period from work at office to work at home, for over the next couple of years, we think, the small one can work well as the prototype of a remote work facility, as long as they are located in a good area and the facility itself is not too old.
3 Redevelopment opportunity
Over the next couple of years, it may be a phenomenon that we live in an apartment which has a shared/ private remote workspace, close to station, and with good living environment. Small B grade office may have a possibility to be demolished and redeveloped to deliver such a new building with the sufficient specifications. Generally speaking, evacuating existing tenants has been a troublesome and time-consuming procedure however, under the COVID pandemic and following new normal, some tenants are willing to leave the property. Therefore, this may promote to provide more suitable assets in the market.
4 Prospects for site assembling
We are still uncertain how the people’s living preference would be. As many medias have pointed out, younger generations would prefer living in a countryside to raise their children and maintain a good work & life balance. However, we strongly feel that aged people would prefer living in the city central, taking into account the access to the top medical services. Thus, most likely, majority of aged people tend to live in city central. Now we may be concerned about the over-supply of residential properties. However, in good locations, there should remain the possibility of site development for the high-rise condominium.
In summary, B grade offices have been acquired for not only the price but also its future prospects, the key features are its access, building age and decent size.
Further queries or doubts, please email to ytomizuka@abrilsjp.com
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