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Rethinking Tokyo


For a center of global commerce, Tokyo has always been something of a disappointment when it comes to architecture. The city's skyline is fragmented and buildings that please the eye are rare. And although Tokyo boasts a thriving nightlife, downtown residents' housing choices are usually limited to colorless apartment blocks with little in the way of green space or parks.

Minoru Mori is out to change all that. Japan's most daring property developer, Mori, 68, has strung together a series of projects that marry sleek skyscrapers full of first-rate office space with apartments and stores, all surrounded by plenty of greenery. His goal: to open up new living and working space downtown that will give current residents new options and lure suburban salarymen eager to say sayonara to long hours on the train. "The separation of work and living makes for too much commuting and an unattractive environment," says Mori, president and chief executive of the privately held Mori Building Co. "People can't enjoy the night life, and there's no community."

Mori's latest bid to ease Tokyo's urban ills: a $4 billion project called Roppongi Hills, his most ambitious development ever. The 27-acre site in the capital's entertainment district includes more than 4.3 million square feet of office space, four residential towers with 840 apartments, a hotel, an art museum sitting atop a 54-story office tower, and dozens of stores and restaurants. "My vision is to create a city within the city with everything you need for daily life," Mori says.

Trouble is, he's not the only visionary in town. With land prices down some 75% since the early 1990s, interest rates near zero, and new laws that make it easier to piece together chunks of land for big developments, Tokyo is undergoing a building boom not seen in nearly two decades. Mitsubishi Estate Co. just opened its 1 million-sq.-ft. all-new Marunouchi Building. The 43-story Shiodome City Center near Tokyo Bay opens in January, adding 2.2 million sq. ft. of space. Come September, the 32-story Chiyoda First Building will add another 650,000 sq. ft.

This giant facelift might make Tokyo a more attractive city, but it will also add to growing softness in the real estate market--since most of the developments were planned when the economic outlook was much more bullish. In 2003, 1 million sq. m of top quality office space will come on the market, according to real estate consultants Colliers Halifax. Vacancy rates have already shot up from 3.5% in early 2001 to 6% today. And vacancies may rise to 10% over the next two years--close to the 14% reached in 1994 as the 1980s' property bubble completely burst. That could send rents down a quarter by 2004, says Jim Fink, general manager of Colliers leasing division. "There is a significant amount of new space coming on line every year through 2010," he says.

Mori isn't worried. He says that while a lot of space is coming onto the market, it doesn't represent a glut anywhere near what Tokyo saw in 1994. Furthermore, Mori says all of the retail space and 75% of the office space in Roppongi Hills has already been rented. The apartments--costing between $2,000 and $7,000 per month--won't start renting until early next year. "This is a very popular area, and we strongly believe that our occupancy rate will be very high," Mori says.

As if Roppongi Hills weren't ambitious enough, Mori's company announced last month it will restart construction of a 101-story skyscraper in China called the Shanghai World Financial Center. The 1,500-foot-high building--the world's tallest--was put on hold in 1998. But with another project in Shanghai nearly 100% leased, Mori figures the time is ripe for the tower, which will dominate Shanghai's new Pudong district.

That Donald Trump-like impulse for the grandiose is pure Mori, who, like The Donald, hails from a family of property magnates. His father, an economics professor-turned-developer, launched the company in 1955. Some 20 projects later, and thanks to a threefold increase in property prices during the late 1980s, he had become one of Japan's richest men. When his father died in 1993, Mori and younger brother Akira split up the real estate portfolio and went their separate ways. Akira is now president of Mori Trust Co. and has no formal business ties to Mori Building. "We're rivals--in a good way," Minoru says.

Their investing styles couldn't be more different. Akira Mori is a conservative investor and a tough negotiator on leases. His older brother, on the other hand, likes big, expensive projects. Mori's Atago Green Hills project includes a Buddhist temple. His Motoazabu Hills development features a 29-story apartment tower and two other buildings that are surrounded by greenery. Mori is heavily influenced by the modernist architect Le Corbusier, who advocated high-rise towers set in parks. Indeed, Mori owns a major collection of drawings, paintings, and sculptures by Le Corbusier. "His ultimate motive is to reshape the urban environment," says John M. Tofflemire, a director with Ikoma/CB Richard Ellis in Tokyo.

The question, though, is whether Mori is overreaching with Roppongi Hills. Mori Building has financed the development with $800 million of its own capital and $1.3 billion in loans from a syndicate of lenders that includes the Development Bank of Japan. That pushes the company's overall debt load to $5.6 billion. True, Mori Building has scads of great assets. But that's a heavy load for a company that brought in about $620 million in revenues and earned $47 million in the fiscal year ended in March. However, Mori says: "We don't have any problems with finance."

Maybe not, but potential tenants are playing hardball. Goldman, Sachs & Co.--the project's anchor tenant, expected to take a quarter of the office space--has spent months wringing out rent concessions. Japan's lousy economy, staff cuts by foreign companies, and the explosion in new office space "should put even greater downward pressure on rents," figures Keiko Otsuki, a real estate analyst with Morgan Stanley. Mori acknowledges that he had to make concessions that lower Goldman's costs by some 20%, but says it's worth it to have a high-profile tenant that will attract other financial companies to the project.

To his credit, Mori managed to come out of the 1990s' property bust unscathed by avoiding the golf course and resort deals that felled other Japanese developers. So he may well have a winning plan this time around. But when Roppongi Hills was on the drawing board, most analysts figured that by the time it was built Japan would be growing again and foreign companies would be flocking to Tokyo. It hasn't worked out that way. Mori's vision may be what Tokyo and its salarymen need. But it remains to be seen whether they'll be able to afford it soon enough for Mori to make his money back. By Brian Bremner in Tokyo


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