doing business in Japan


Japanese office space rent and lease terms

8.  Japanese office space rent and lease terms.

In the previous section we looked at the recruitment of your Japanese company President, structuring performance salary packages for your Japanese company's employees and controlling Japanese business expenses. The next question to address (and one which is overlooked by almost all foreign companies starting business in Japan) is where to locate your Japanese office for maximum business efficiency.

I have spent the past 18 years in sales and tend to be unusually customer and profit focused in all my business decisions. When deciding on an office location, I recommend the following factors to consider:

  1. cost
  2. door-to-door time to visit customers and partners
  3. convenience (for customers to visit)
  4. convenience for employee commute

There are many other considerations but in terms of operating your Japanese subsidiary office efficiently and profitably, these four should have the most influence on your decision.

Most foreign companies starting business in Japan start in the Tokyo region (which for this discussion including Yokohama, Kawasaki and Chiba). Tokyo is not the only location from which to start doing business in Japan, but with more than 35 million people (>30% of Japan's population) living in the Tokyo region, rapid and reliable high-speed 'bullet train' (shinkansen) trains running north and south from Tokyo, daily direct flights to all major capitals from Tokyo's Narita International Airport and to all major Japanese regional centers from Haneda Airport, Tokyo is definitely the most convenient location.

The good news on cost is that Tokyo land prices have dropped more than 70% in the past decade and one result is a glut of new office space coming on to the market which puts further downward pressure on rents. The 'year 2003 problem' (27 million sq. ft. of office space came onto the market in 2003 and overall office vacancy rates rose to 8.4%) has helped foreign companies such as Yahoo!, GE and Goldman Sachs, who have large numbers of local employees, to negotiate exceptional lease terms (including initial rent-free periods) in some of Tokyo's most prestigious buildings. The year 2003 problem has become the year 2004 problem and larger developers needing to quickly let large blocks of space are forced through necessity to continue conceding exceptional terms.

Office space in central Tokyo now costs from ~US$4 - ~US$12 per square foot (US$180 - US$540 per square meter) per month. While all office rents have dropped, the bad news for smaller foreign companies starting business in Japan (and who do not need tens of thousands of square feet of Japanese office space) is that smaller landlords (many of whom are private individuals) maintain hope that the heady heights of the 1980s will soon return and often refuse to negotiate substantial concessions on office lease deposits or contract conditions (such as the above noted rent-free periods being conceded to larger lessees). Japanese landlords traditionally demand very high refundable deposits of 10 - 15 months rent although more enlightened corporate landlords will often now accept a deposit of 4 - 6 months rent. Another cultural difference between Japanese office leases and those of the US or Europe is that in Japan the lessee pays all agent's commissions (usually 1 month's rent).

Let's consider a US-Japan office lease comparison. On the outskirts of upscale Boulder, Colorado, the basic rent (excluding taxes and common area fees) for a 2,500 square foot (70 square meter) standard finish office will be around US$2,100 per month, with a move-in cost of around US$4,200 (US$2,100 of which is refundable upon vacating). That same office, even on the cheap northern outskirts of Tokyo, will cost around US$10,000 per month with a move-in cost of around US$80,000 (US$60,000 of which is refundable upon vacating) and that's before you do any specialist build-out work! Clearly to succeed doing business in Japan, you will need to carefully consider and control the overall lease costs of your Japanese subsidiary's office.

There are six simple ways I have used to control Japanese office lease costs:

  1. negotiate hard (and now of course leverage the 'year 2003 problem'),
  2. rent to fit, i.e. only rent exactly as much space as you need and use that space very efficiently,
  3. rent in a lower-cost area away from the trendy fashionable areas of Tokyo,
  4. rent an office in an older (less prestigious) building,
  5. rent an office that is not close to a railway station,
  6. rent 2 offices:
    • a smaller prestige office close to a rail station for sales staff and customer meetings,
    • a larger less prestigious office in the suburbs for more numerous support and administration staff.
All these 6 ways are also used by Japanese companies, even the largest, to reduce their office lease overheads.

"..which of Tokyo's 100+ railway and subway stations do you need to be close to?"

A beneficial effect of the year 2003 problem for smaller companies starting business in Japan, is that demand, rental values (and even deposit requirements!) for some very nice offices in parts of Tokyo which are not as trendy as Shiodome and Roppongi Hills, but are potentially much more useful, convenient and efficient for doing business, have dropped substantially. One such location is Hamamatsucho, which is just 10 minutes by train south from Tokyo Station. The train is how the Japanese do business and in fact the four key aspects noted above for deciding a location for your Japanese office converge to one key decision - which of Tokyo's 100+ railway and subway stations do you need to be close to?

9.  Japanese office space just 10 minutes from Tokyo station >>

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