Aging-Related Depreciation of Office Rents and Renovation Effects

The items of "Office space rental" in the Services Producer Price Index (SPPI), which is created and published by the Bank of Japan, considers the aging-related depreciation of office properties over time as a decline in service quality and reflects this in the index. However, the current method relies on empirical analysis derived from 2007 data, which does not adequately consider changes in external conditions since then. This study utilizes new lease contract rent and attribute data provided by the XYMAX Group, a leading office brokerage and management company, and applies the hedonic method to empirically analyze the impact of property depreciation on office rents. The primary findings of this study are as follows: (1) Office rents in Japan generally depreciate at a consistent rate of 1.4% annually for about 25 years after the building is newly constructed, after which the rate of depreciation gradually slows. This trend aligns with prior studies conducted on commercial property in the United States. (2) The pace of depreciation varies based on property size. Large-scale properties depreciate slightly faster than small-to-medium properties. However, while small-to-medium properties continue to depreciate even after the rate of depreciation has slowed, large properties tend to maintain a relatively stable state once their depreciation rate diminishes. (3) Renovations reverse depreciation by approximately 8.2 percentage points at most compared to rents at the time of new construction. This reversal effect lasts for about 16 years, during which an average mitigation effect of 5.4 percentage points in depreciation is observed.