Bank of Japan working paper finds Japanese office rents depreciate 1.4 percent a year for about 25 years and renovations partly offset the decline

The Bank of Japan has published a working paper examining how aging affects office rents in Japan for the office space rental component of the Services Producer Price Index. Using new lease contract rent and attribute data from the XYMAX Group and a hedonic approach, the paper finds that office rents generally fall by 1.4 percent a year for about 25 years after a building is newly constructed, after which the pace of decline gradually slows. The study also finds that depreciation differs by property size. Large-scale properties depreciate slightly faster than small-to-medium properties, but once the rate of decline slows, large properties tend to remain relatively stable while small-to-medium properties continue to depreciate. Renovations reverse depreciation by up to 8.2 percentage points relative to rents at the time of new construction, with that effect lasting about 16 years and producing an average mitigation effect of 5.4 percentage points. The paper notes that the current SPPI method relies on empirical analysis based on 2007 data and does not fully reflect changes in external conditions since then. The Bank states that the paper is part of its Working Paper Series and is intended to stimulate discussion. The views expressed are those of the authors and do not necessarily represent the official views of the Bank of Japan or the XYMAX Group.