The Osaka 2011 Problem — a historic opportunity?

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.

18 thoughts on “The Osaka 2011 Problem — a historic opportunity?”

  1. Seoul has a big new development called New Songdo City—always think positive!y
    Dallas, Texas with its new Cowboys Stadium and Victory Park!

    Don’t give up on dreams. Osaka is looking very cool!

  2. I’ve read the piece twice, and I’m completely missing where this is a good thing. Could you spell it out?

  3. Ed: This could be a good thing because:

    1. Rents will drop and give businesses opportunities to upgrade
    2. Dilapidated buildings and neighborhoods will have the chance to get redeveloped
    3. Not addressed in this post, but in the link at Osaka Insider, is that the commute situation in Osaka could improve
    4. Entrenched landowners may be usurped from their comfortable positions of economic security
    5. Add 1 through 4 and you get: possible kickstart to Osaka’s lame economy

  4. And then there’s this plan:

    HIGASHI-OSAKA, Osaka Prefecture-The rising sun will leave its mark on the moon, if all goes according to plan.

    An innovative Osaka group of small factories has announced its intention to put a bipedal humanoid robot on the lunar surface by 2015.

    The Space Oriented Higashiosaka Leading Association (SOHLA) said it will utilize its experience of developing and putting the Maido-1 satellite into orbit last year.

    The group, comprising engineers from small and midsize enterprises, said it wants to make a contribution in geological research.

    As the government plans to send a robot to the moon in 2015, the group plans to hitch a ride on the same mission.

    Once the robot is on the surface of the moon, one of its first missions will be to make an imprint of the Hinomaru rising sun flag, officials said.

    “We want the world to know the high standard of our manufacturing technologies,” said Noriyuki Yoshida, a SOHLA official.

    I certainly like idea of Osaka being the center of the booming space robot industry.

  5. It’s a very fiercely competitive economy either you win or you lose! Better get used to it!

    Looking forward to Osaka Station in 2011!

  6. Curzon,

    Projects like this seem good in terms of breathing new life into cities. I am interested in knowing what kind of interest banks will have in the underwriting.

    2011 is considered to be the peak year when the market is flooded with too much new real estate

    I’m not abreast with how much new real estate is expected in 2011, but this year and to a slightly lesser extent the next two years, there is going to be a lot of demand for banks to refinance commercial real estate loans, with the collateral properties being mostly office and retail. Estimates are JPY 1.2t this year, and between 700 and 800b each of the next two years.

    Although most of these properties are in Tokyo or Greater Kanto, I have heard scuttlebutt about banks being extremely cautious towards underwriting loans or investing in commercial mortgage backed securities outside of where they confidently monitor performance. Banks have to make loans, and there ‘appears’ to be some sort of stabilization in terms of prices/yields, but after this year passes, who knows what investor appetite will be when the underwriting on Osaka 2011 starts to ramp up…

  7. Me too. In other news:



    Asahi reports on this development, but adds the latest Miki Shoji office vacancy numbers, and reactions from a private viewing of the Umeda development held on 30 April. It looks nice, but the article mentions oversupply as a threat to rent levels and vacancy, mentioning that the development in question is having a hard time landing tenants (currently 30%, shooting for full occupancy in three years).

    Part of the reason for this is companies are caring less about brand recognition and more about lowering costs. I find this easy to believe, judging from Resona’s decision to move offices this summer from the Yamanote loop to Koto-ku.

  8. “I’m surprised this didn’t get more comments…”

    Jury is still out on the Japanese/world economy.

    You set up an interesting scenario here, but I think that most people taking a long view are on the fence between tentative and depressed – hence little to say.

  9. Sick and tired of the lame excuses of oh it’s too expensive BS…that’s just laziness, negativity, feeble excuses and not willing to work for it.
    I totally blame people for causing this depression and decay in our economy! Stupidity sadly rules lately it’s very regrettable.

    Competition brother you either win or you lose…very simple I repeat! It’s that difference between the wealthy competitor who can afford the top quality expensive and then there’s the poor competitor on the other side who can’t even afford a house. Not rocket science people!

    Look at Dallas, Texas Seoul, Korea Shanghai, China lately you think they are giving up, lacking ambition and being all gloom and doom? Heck no! Dallas, Texas has more wealth than New York City by the way now! Think about it! Look what’s possible

    Yeah but sadly though we have rotted to the very core and have turned from a rich economy to now a sad poor economy…I’m very disappointed about that!
    Either rich or poor only two choices!

    I simply see Osaka as hope, possibility and optimism! Osaka it’s either win or lose

  10. Resona Holdings today announced that they’re moving their head office from Osaka to Tokyo, although leaving the Resona Bank office in Osaka. Have any companies recently announced intentions to move INTO Osaka?

  11. Osaka and Tokyo should compete, Osaka is better.
    Don’t forget the financial district is in Nihonbashi area of Tokyo

    Dallas, Texas and New Songdo of Seoul are certainly able to attract companies

    I totally blame the Japanese for being so pessimistic and depressing–考え方の問題

  12. Just to add to Roy’s comment, Resona HD completed the actual “move” of its Tokyo honsha from Otemachi to Kiba (right next to Ito Yokado, whoo-hoo!) and then they decided to change the registered location of the holding company’s headquarters to the address of the Tokyo honsha, but they will operationally keep things unchanged, with the subsidiary Resona Bank headquartered in Osaka.

    For more mind-numbing fun, check out Resona’s ayumi here:

  13. I don’t know any companies that specifically moved to Osaka, but I remember that Nissan left Tokyo for Yokohama a few years ago.

  14. There are companies who move their head office to Tokyo, usually when business is good, and then move back when times get tough. There are also examples of companies merging, hanging out in Tokyo for a while and then relocating.

    As an example of the first, construction machinery company TCM (formerly known as Toyo Umpanki) recently closed their head office in Nishi Shimbashi and transferred to Osaka. Tokai Tokyo Securities moved their head office from Nihombashi, Tokyo to Nagoya just last month. Tokai was always the leader in the merged group but the Nihombashi address was initially more prestigious. The company has since been bulking up in the Nagoya area so it makes more sense to move back home.

    The move from Osaka to Tokyo still seems popular. A very significant transfer this year is Obayashi Gumi, one of the big 5 general contractors. It’s true that the company’s Tokyo base has effectively been the head office since the 70s but they kept their registration in Osaka, if only for symbolic purposes. When the move is ratified, the company will no longer have any board members in Osaka. Nevertheless, a member of the founding Obayashi family will remain as an executive of the Kansai Keizai Doyukai.

  15. For what it’s worth:

    “The planning for these new projects goes back 10 or 15 years when the economy was going strong,” said Yasuhiro Matsumoto, an analyst in Tokyo at Shinsei Securities Co., who grew up and went to university in the Osaka area. “They are building it now simply because they started the project at a good time. If they make a tall building then many companies will be attracted, but total demand is not going to increase — tenants will simply move from nearby.”

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