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Osaka - An economic rebound and loose money policy under Prime Minister Shinzo Abe briefly halted a long slide in Japan's commercial property market, but the benefits of "Abenomics" appear increasingly limited to Tokyo, leaving a moribund hinterland.
For a while, as the Bank of Japan printed money and Abe spent it, commercial property investment, a barometer of economic activity, spilled beyond the capital into the country's larger regional cities.
In the year to July 1, commercial land prices rose 1.9% in Tokyo, and 1.5% in Osaka and Nagoya, notching up a second year of gains.
That patchy recovery - prices in the rest of Japan still fell 2.2%, marking a 23rd consecutive annual decline - now appears to be narrowing.
Rents for prime offices in Tokyo continued to rise in November from October, but in Osaka they were flat, and those in all other major cities fell, according to the latest data from broker and research firm Miki Shoji Co.
"Large foreign investors are directing their focus to Tokyo, where rents for office properties are clearly growing, which could increase the gap in asset values between Tokyo and the rest of the country in the near term," said J-P Toppino, managing partner of private-equity investor PAG Real Estate.
A huge city block in central Osaka, the priciest section of Japan's second city, is emblematic of the problem. It remains undeveloped, except for temporary office structures, since Japan Post tore down the Osaka Central Post Office in 2012, intending to build a 40-storey office and retail tower complex.
Japan Post has shelved the project while it "considers the economic environment and development plans in the neighbourhood".
The neighbourhood doesn't look promising. On the other side of the station, within sight of Japan Post's temporary premises, lies the giant Grand Front Osaka office and retail complex.
That development, which opened in 2013, is 30% empty.
No new blood
Though Miki Shoji says vacancy rates for prime Osaka offices fell to 8% in November from 9.85% a year ago, that remains above the 5% to 6% considered healthy, and the city's average annual office rent has fallen 1.5% over the past year.
That's because there's no influx of new blood, says Yasutaka Inoue, managing director at Osaka-based developer Keihanshin Building.
"When a big office tower is built in Osaka's city centre, new tenants move in from the same area, not from outside Osaka," he said.
Keihanshin generates 90% of its revenue in Osaka, but wants to increase its focus on the Tokyo market, Inoue said.
In the city of Nagoya, heart of Japan's third-biggest regional economy and home to Toyota Motor Corp, the property market took heart in anticipation of a super-high-speed train service, though it won't be in operation for at least 12 years.
The number of Nagoya office property transactions jumped 8% in the first half of 2014 from a year earlier to 94 deals, according to local broker Ichi. And the city's offices are filling up faster than Osaka's, with the vacancy rate down to 7.5% in November from 9.8 percent a year earlier, Miki Shoji data shows.
But that trend looks unsustainable.
More than 330 000 square metres of prime office space is set to come online in the coming two years, including five major office towers.
That would add more than 10% to the current total, and one local broker predicts it could push Nagoya's vacancy rate back as high as 17%.
Though some prime office buildings in Osaka, Nagoya and Fukuoka have started to fill up over the past year, rents have not turned higher. Demand is just not strong enough, say developers and brokers, boding ill for a sustained recovery in real estate prices.
"Investors will need greater skill and better expertise to generate good returns on properties outside Tokyo," said Katsumi Tanimoto, general manager of business development Fukuoka-based property investor Genkai Capital Management.
