Japanese office rent and lease terms

Japanese office rent and lease terms

In the previous sections, we looked at recruiting your company’s Japanese company President, structuring performance-related pay for your company’s Japanese employees, and controlling Japanese business entertainment costs. Next we’ll look at a decision that many companies starting business in Japan often don’t consider seriously enough; where to start your Japanese office for best business efficiency.

I have more than two decades experience selling in Japan, including managing several companies, and am very customer, cost, and profit focused in my business decisions. Several times I have analysed the business efficiency of office locations, both for my own companies and for client companies. Based on my experience, I recommend considering the following:

1. Cost.
2. Door-to-door time to visit customers and partners.
3. Convenience for customers to visit.
4. Convenience for employees’ commute.

There are many other factors for your company to consider, but in terms of operating its Japanese subsidiary office efficiently and profitably, the four above should have the most influence on its decision.

Most foreign companies starting business in Japan, setup in the Tokyo area, which for this discussion is actually the Kanto region including Yokohama, Kawasaki, Saitama, and Chiba. Tokyo is not the only place from which to start doing business in Japan, but with more than 35 million people living in the Tokyo region, a central-Tokyo workforce of around 6,400,000, rapid and reliable high-speed shinkansen ‘bullet trains’ running north and south from Tokyo, daily direct flights to all major capitals around the world and to all of Japan’s major cities from Tokyo’s Narita International Airport and Haneda International Airport, Tokyo is definitely the most convenient place.

The good news on cost? Japan’s seemingly endless recession and deflation caused Tokyo land prices and office rents to drop more than 70% in the 1990s, 2000s and early 2010s. The recession also caused many companies to downsize their staffing levels and office space. Tokyo moved on from its over-development of the early 2000s, known as the ‘year 2003 problem’ when 27 million sq. ft. of office space came on to the market and overall office vacancy rates rose to 8.4%, but developers continue to build and there is still more office space available than there are companies to lease it.

Tokyo office rents may have dropped, but office space in central Tokyo still costs from US$4 – US$12 per square foot (US$180 – US$540 per square meter) per month, sometimes much more in Tokyo’s prestigious glass-sided buildings. One factor which has not changed is that Tokyo landlords’, many of whom are private individuals, often refuse to negotiate any concessions on office lease deposits or contract conditions. Generally, Tokyo office leases include:

• A refundable deposit of 6 – 12 months’ rent (up to 20 months’ rent in prestige buildings).
• A non-refundable deposit of 1 or 2 months’ rent (a custom leftover from post World War II days when such non-refundable deposits helped subsidize Tokyo’s rebuilding cost).
• The lessee pays the real-estate agent’s commission of 1 month’s rent.
• Office lease agreement term of 2 years.
• The lessee can end the lease with 3 – 6 months’ notice.
• If the lessee does not end the lease, it will automatically extend every 2 years for a further 2 years, with a 1 month’s rent renewal fee payable at each extension.
• The lessee must return the office space to its original condition upon vacation using an approved contractor.
• The landlord can deduct various cleaning and refurbishment amounts from the non-refundable deposit.
• The landlord usually demands a personal guarantor, who must live in Japan, to guarantee the lessee.
• Many landlords also demand lease guarantee insurance, which costs 1 month’s rent.

The factors most affecting a specific office’s rent in Tokyo are:

• Distance from a railway or subway station (closer is more expensive).
• Proximity to prestige retail facilities (closer to a high-end shopping area is more expensive).
• Building size (larger is more expensive).
• Building age (newer is more expensive).
• Number of elevators (more is more expensive).

Negotiating with a Tokyo landlord is never easy, but there are six simple ways I have used to control Japanese office lease costs:

1. Simultaneously negotiate terms on 2 or 3 different locations and contract the one where you get the best terms.
2. Negotiate hard to:
   1. Eliminate the non-refundable deposit.
   2. Eliminate any guarantee insurance fee.
   3. Reduce the refundable deposit.
   4. Receive the first 3 months rent-free.
   5. Reduce the monthly rent.
   6. Reduce the amount of refundable deposit the landlord keeps at the end of the lease.
   7. Extend the lease term past 2 years.
3. Rent the minimum space your Japanese office needs.
4. Rent in a lower-cost area away from Tokyo’s trendy fashionable areas.
5. Rent an office in an older, less prestigious, building.
6. Rent an office that is not close to a railway station.
7. Rent 2 offices:
   1. A smaller prestige office close to a railway station for sales staff and customer meetings.
   2. A larger less prestigious office in the suburbs for more numerous support and administration staff.

These are also the ways that Japanese companies, even the largest, reduce their office lease overheads.

There are some very nice offices in parts of Tokyo which are not as trendy nor as expensive as Marunouchi, Shiodome, Omotesando, Ginza, Otemachi, or Roppongi Hills, but are potentially much more useful, convenient, and efficient for starting business in Japan. One such area 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 site for your Japanese office converge to one key decision; which of Tokyo’s 100+ railway and subway stations should your company’s Japanese office be close to?