Osaka has a problem. (Well, OK —it has lots of problems.) But there is one problem out there that is so big it has been called the “Osaka 2011 Problem”—the massive construction of skyscrapers and other major real estate projects across the city. These projects will come online on a rolling basis for years, but 2011 is considered to be the peak year when the market is flooded with too much new real estate. Hence the new buzzword.
Why are new skyscrapers a problem? Osaka’s city economy is a basketcase, effectively two decades behind the times with a tired industrial sector and trading economy that has not evolved into the modern era. It has failed miserably in competing with Tokyo, Yokohama, Nagoya and Fukuoka, all of which have found an important niche in the 21st century global and Asian market. So all this premier real estate in Osaka will be finished, but there will not be enough tenants to provide the demand for this new supply.
Yet I discussed this with a learned friend who knows Japan’s real estate market inside and out. He says that, as they main developers are all the big boys, so they be able to entice key keiretsu companies to take space in their new projects to get a head start on income. There will be a flight to quality, as major companies relocating into new projects will give everyone an opportunity to upgrade, while rent levels will come down (think Dubai!), and owners of old real estate will come under pressure to sell assets.
This is the story of urban development elsewhere. Larger companies have cheaper capital costs and as one area’s development cycle completes they look at another area to buy up and re-develop. Some projects in the pipeline have as their business plan the buy out of seedy businesses (and second-rate businesses) to aggregate land and build something nice. In other words, gentrification! This does create value.
Some of these projects can be highlighted and looked at under the microscope, such as the Kita Umeda Yard—check-out insight on the project from the blog Osaka Insider. This could well become the new hot spot, as Shin Osaka loses tenants to Kita-Umeda. And as Shin-Osaka declines, developers may well buy out land around Shin Osaka and re-develop Shin Osaka area, at the same time that one of the trains is extended from Umeda to Shin Osaka. Once again, the gentrification strategy.
My learned friend also some some further insight—this procession is fair. Japan is similar to Western Europe in that there is a traditional landed class that lives off of rent, but they never reinvest and sad buildings last for years without repairs. The Osaka redevelopment should make the property market more competitive, and those landowners that can’t survive will be forced to sell out.
Will this be good or bad? Only time will tell. But from a macro view, this so-called problem may well be the kick that Osaka needs to re-build a sad economy.