2024 Reports

How Property Rents and Expenses Depreciate: A Case of Tokyo Office Properties

Yoshida, Jiro; Kawai, Kohei; Geltner, David; Shimizu, Chihiro

This is the first comprehensive study on the age profile of new rents, average rents, operating expenses, net operating income, capital expenditure, and net cash flow for office properties in Tokyo. The Intrinsic Estimator method is employed to decompose the observed depreciation into two components: physical deterioration and functional obsolescence. There are four main findings. First, the rate of rental depreciation in Japan is low and explains less than half of the rate of depreciation of property prices, although it is higher in earlier years. Second, average rents exhibit nominal rigidity. Third, approximately half of the observed depreciation in new rents is due to physical deterioration as opposed to functional obsolescence, which is driven by changes in tenant preferences and advances in building technology. Last, operating expenses are independent of age, whereas capital expenditure increases in the first 20 years. Our study contributes to the literature by estimating depreciation rates for commercial real estate rents, costs, and cash flows, with new insights into the detailed age profile and sources of economic depreciation.

Keywords: commercial real estate, offices, Japan, depreciation, age-period-cohort decomposition, hedonic model.

JEL Codes: R33, L16, E31