Office vacancy rate across Tokyo falls for third consecutive quarter

Tokyo’s 23 Wards

The vacancy rate for Tokyo's 23 wards overall fell by 0.3 points from the previous quarter to 6.5%, the third consecutive quarterly fall. In the third quarter, companies relocated or expanded their existing space for a variety of reasons, including business expansion, business continuity planning, consolidation, integration and seeking improved locations. These factors all helped to push down the vacancy rate. As seen in previous quarters, well located, high-spec buildings with large floor plates are seeing strong interest, and are at less risk of seeing vacancy levels increase.

Tokyo Grade A vacancy rate was up by 0.4 points to 7.7%. Grade A assumed achievable rents were unchanged from the previous quarter at ¥30,600 per tsubo. There remains a high level of pent-up demand for Grade A space, and this demand further increased during the quarter, and as a result relocations and expansion by existing tenants are continuing.

Hiroshi Koizumi, executive director of CBRE’s Office Services department, explained, "With Tokyo awarded the 2020 Olympics, expectations that Abenomics will boost the economy have become more realistic, and market sentiment for offices has continued to see improvement. Asking rents are beginning to factor in rental increases, albeit tentatively, and tenants have also begun to accept these increases. With rents widely anticipated to rise, tenants are looking to secure value-for-money space while they still can. Even allowing for the consumption tax hike and corporation tax cut scheduled for April 2014, companies' demand for office space has risen recently and with little new supply due in the fourth quarter, vacancy is expected to continue declining."

Osaka

The overall vacancy rate in Osaka saw a slight decline of 0.1 points to 9.9% as tenants vacated their former buildings to move into newer buildings. However, quarter-on-quarter net absorption increased by 41%, demonstrating that overall demand in the market is still strong. The Grade A vacancy rate improved significantly by 1.4 points to 16.3%, as tenants leased space in newer buildings. There was an inflow of demand for relocations from suburban offices, not only to Umeda, Midosuji Boulevard and neighboring areas, but also to the Shin-Osaka and Namba areas, as tenants sought improved locations and office environments. Assumed achievable rents for Grade A buildings fell slightly to ¥18,900/tsubo, a decline of ¥50 quarter-on-quarter. Rents are likely to remain flat, with well-located, higher quality buildings pushing rents up at the same time that downmarket buildings, which are generally further from the station, are seeing discounted rents in order to fill space.

"The reason for the comparatively small decline in Osaka's overall vacancy rate is that demand was not strong enough to fill the quantity of space vacated by tenants relocating into newer buildings. Market-wide, the recovery in demand has not slowed," said Takashi Katono, executive director of CBRE’s Osaka branch. "Market conditions have taken a turn for the better, with vacant space filling in new and recently completed buildings, where rents are higher, and tenants are leasing space in a wider range of areas. The vacancy rate is likely to continue declining."

Nagoya

Tenants in Nagoya are still keen to improve the location of their offices, but, with few newer properties available, owners of some older buildings have in some cases filled vacant space by being flexible on rent. However, the market appears to have polarized, with overall demand not extending to ageing buildings. The Nagoya Grade A vacancy rate rose by 0.8 points to 3.3%. Although supply remains tight, the vacancy rate rose due in-part to tenants terminating their leases. Assumed achievable rents fell slightly to ¥22,050/tsubo, a decline of ¥200 quarter-on-quarter. The overall Nagoya vacancy rate rose by 0.1 points to 9.9%.

"There is almost no new supply expected until 2015 when a large development is scheduled," said Takahiro Fujimoto, executive director of CBRE’s Nagoya branch. “Although there are a few companies that need to relocate, either for better locations or for other reasons, the market is expected to remain largely flat."

Nationwide

Although both corporate earnings and sentiment are improving, as the marked improvement of Japan’s Tankan survey indicates, nationwide demand was flat in the third quarter. However, vacancy rates improved in seven out of thirteen cities. With little new supply, there is a shortage in newer properties and other high-quality properties. Consequently, tenants are shifting their focus to the space available, as existing tenants relocate to newer buildings. There is also continued demand from tenants opening new offices, expanding offices, or improving the location of their offices. Some landlords have stoked demand by offering lower rents in order to encourage relocations, while others have already begun to raise rents. Overall, however, rents were flat due to the majority of landlords maintaining existing levels. Over the next quarter, rents are expected to stay flat in most cities.

For further details of market trends and forecasts as well as market data, please review the Japan Office Market MarketView Q3 2013, scheduled for release on October 28th.

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