Tokyo vacancy rate weathers massive supply, passes its peak; Grade A rents near turnaround at 29,900yen / tsubo

CBRE releases Q3 2012 data on office building market trends for 13 cities nationwide

​2012/10/17

CBRE today released data on office building market trends for 13 major cities nationwide for Q3 2012.

Noteworthy Trends

• The vacancy rate for Tokyo’s Grade A buildings and the 23 wards have passed the peak, improving to 9.3% and 7.5% respectively.
• The vacancy rate for Osaka improved for its fourth consecutive quarter to 9.9%, dipping below 10% for the first time in 3 years; Nagoya improved for its ninth consecutive quarter to 11.4%.
• The supply-demand balance improved as nationwide sentiment favored relocations and vacancy rates began a downward trend.
• In addition to demand spreading to buildings favorably located in Osaka and Tokyo, in some cities demand appears to be spreading to a wider variety of building types.

Tokyo's 23 Wards

The large new supply that came online in Tokyo during the previous quarter served to prime the pump for continued firm demand. As a result of the creation of approximately 54,000 tsubo of new demand, the Grade A vacancy rate improved by 1 point from the previous quarter to 9.3%, as the overall vacancy rate for the 23 wards improved by 0.4 points to 7.5%.

In fact, the supply-demand balance is improving as large floor area at new and recently constructed buildings continued to be filled in conjunction with large secondary vacancies at existing buildings, where subsequent tenants have been secured. The demand was not limited to recently constructed large buildings, but this quarter was also clearly characterized by an expansion in demand to well-located existing aged buildings, as well as smaller to mid scale buildings. Thus, the market climate is one of spreading demand, which is now being felt at buildings with wide-ranging attributes.

Amid these conditions, assumed achievable rent at Grade A buildings remained flat compared to the previous quarter at 29,900yen per tsubo, with signs that can be taken as indicative of a turnaround in rent levels.

“An increase in relocations related to business continuity planning and efforts to upgrade building performance and earthquake resistance for their headquarters has boosted large-scale demand,” said Yoshihiro Watanabe, Executive Managing Director of Office Brokerage Services at CBRE. While leading directly to increases in occupied floor area, this trend is attracting interest for its contribution to future revitalization of the market by improving quality through the kind of functional renewal that comes with reconstruction and redevelopment of buildings designed to old earthquake resistance standards of office buildings in Tokyo. During this quarter, improvement of the supply-demand balance made full-fledged progress as demand spread across a broad market spectrum. In the near future, we may arrive early at a turnaround period for rents, centering on central-city areas.”

Osaka

The vacancy rate in Osaka improved for the fourth consecutive quarter, reaching 9.9%, down 0.1 points from the previous quarter and dipping below 10% for the first time in three years. Meanwhile, the vacancy rate in the Grade A market rose 0.8 points to 11.6% due to the completion of a large building directly adjacent to Shin-Osaka Station with some vacancies unfilled. In addition to demand for higher-grade buildings this quarter, demand for contiguous spaces concentrated on older buildings with no earthquake resistance issues. On account of this, the filling of vacancies continued smoothly, including some cases of large relocations for the purposes of office consolidation and floor area expansion. Assumed achievable rent at Grade A buildings was up slightly at 18,700yen per tsubo, suggesting that rents have already bottomed out.

“Tenants have been particularly active in Umeda and Shin-Osaka. These areas continue to absorb demand, and rents have already bottomed out,” said CBRE Kansai Regional Office Managing Director Teruo Ueda. “A large building is expected to be completed next quarter with high occupancy, and inquiries in advance of the expected completion of the ‘North Yard’ in March of next year have increased. In addition to signs of new entry into the market by overseas firms, these factors have led to expectations of very active demand.”

Nagoya

In Nagoya, two large buildings were completed around Nagoya Station and in Fushimi, both having had no trouble absorbing demand, and the closing of one large building for reconstruction also contributed to a ninth consecutive quarter of improvement in the vacancy rate, which fell 0.4 points from the previous quarter to 11.4%. The Grade A vacancy rate fell by 0.4 points from the previous quarter to remain low at 2.7%. Assumed achievable rent was virtually unchanged at 22,150yen per tsubo, its stability reflecting the scarcity of supply.

“Within Nagoya, tenant demand for the area in front of the station is active, and inquiries from other zones have been robust,” said CBRE Nagoya Office Senior Director Noriyuki Tsutsui. “Overall, rents have bottomed out. And since the mismatch between supply and demand will soon be eliminated, what’s called for are strategies of differentiation through dividing up floor space to meet tenant needs, or through ensuring large contiguous spaces.”

Nationwide Market Climate

With corporate sentiment now amenable to relocation, a perceived sense of rent affordability is leading to firm demand in all areas for relocations to center-city districts for the purpose of consolidation and earthquake resistance upgrade. Upgrades and relocations for expansion are on the rise, with vacancy rates improving nearly everywhere nationwide. In addition, asking rents have remained steady.

For detailed data and market conditions for each zone and metropolitan area, please review the "Japan Office Market View Q3 2012," published October 25.

Attachment: Press Release

Related Links: MarketViews

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