CBRE releases Q2 2019 Japan Office MarketView

Tokyo All-Grade vacancy rate rises for first time in two years; Tokyo Grade A rents expected to fall 1.7% Q2 2019 to Q2 2020

CBRE today released its Q2 2019 Japan Office MarketView covering market trends in office buildings in 13 cities across Japan.

HIGHLIGHTS FOR MAJOR CITIES

• Tokyo All-Grade vacancy rate rises by 0.1 point q-o-q to 0.7%, the first increase since Q2 2017; Grade A vacancy rate rises 0.2 points q-o-q to 0.8%, the first increase in five quarters
• Osaka vacancy rates stand at historic lows across all grades; Grade A vacancy rate falls 0.3 points q-o-q to 0.2%
• No vacancy for Nagoya Grade A; All-Grade vacancy rate falls under 1% for the first time

CBRE RENTAL FORECAST (Q2 2019 – Q2 2020)

• Tokyo Grade A rents: Forecast to fall by 1.7% over the next year
• Osaka Grade A rents: Forecast to rise by 3.5% over the next year
• Nagoya Grade A rents: Forecast to rise by 2.7% over the next year

■ Tokyo 23 Wards
The Tokyo All-Grade vacancy rate increased by 0.1 point q-o-q to 0.7% in Q2 2019. Although only a minor rise, it nevertheless marked the first increase in the vacancy rate since Q2 2017. The uptick was mainly due to secondary vacancies opening up after tenants relocated to buildings completed in 2018. Also this quarter, one new Grade A building reached completion with vacant space remaining, meaning that the Grade A vacancy rate also rose - the first time in five quarters. Meanwhile, the market continues to see expansionary movess or relocations relating to redevelopment of existing premises. As available space still remains limited overall, companies looking to move to larger premises are also considering leasing spaces that became vacant this quarter.

Tokyo All-Grade rents stood at JPY 22,490 per tsubo in Q2 2019, a rise of 0.6% q-o-q. Grade B, which was the only segment to see a decline in the vacancy rate this quarter, saw rents rise q-o-q by as much as 1.3%.

A total of 300,000 tsubo of new Grade A space is scheduled for completion in 2019 and 2020. To be sure, leasing has been progressing well for the upcoming new buildings. As of the end of Q2, the tenant pre-lease ratio was over 90% for buildings scheduled for completion in 2019, and over 60% for buildings scheduled for completion in 2020. However, many of the tenants signing pre-leases in these properties are relocating from existing buildings, some of which may find difficulty in back-filling their vacated space, given growing economic uncertainty. As such, it is increasingly likely that such vacancies in existing buildings may continue to push up the overall vacancy rates. CBRE expects that this would lead to Tokyo Grade A rents to fall by 1.7% over the next year (Q2 2019–Q2 2020).

Takashi Katono, executive director of CBRE's Advisory & Transaction Services (Office), commented: "We are seeing signs of change in the market. While there remains strong demand from companies seeking to increase floor space, some properties are requiring more time than before to secure replacement tenants due to the gap in rental expectations between owners and candidate tenants. With vacancies in existing properties starting to emerge, other owners are becoming more flexible on asking rents and other terms."

■ Osaka
The Osaka All-Grade vacancy rate was 1.2% in Q2 2019, marking the lowest level since this survey began recording this figure in 1993. The period saw a large number of tenants looking to secure space, regardless of location or building grade. Supply-demand conditions are expected to remain tight until 2022 when a large volume of new supply is expected to enter the market. Osaka All-Grade rents rose by 1.7% q-o-q to JPY 13,440 per tsubo.

The Osaka Grade A vacancy rate fell by 0.3 points q-o-q to a record low of 0.2% in Q2 2019 as the little available space was filled by tenants leasing additional space within their existing building. Osaka Grade A rents rose by 3.5% q-o-q to JPY 25,200, the first time to surpass the JPY 25,000 level. Further Grade A rental growth is expected amid tightening supply-demand conditions, with CBRE forecasting an increase of 3.5% over the next year.

Hideo Oue, senior director of CBRE's Advisory & Transaction Services (Office), Kansai office, commented: "Amid the tight supply conditions, there have been an increasing number of cases involving tenants having to accept aggressive terms presented by owners. Rents are likely to remain firm for some time."

■ Nagoya
The Nagoya All-Grade vacancy rate declined by 0.1 point q-o-q to 0.9% in Q2 2019, falling below 1% since the survey began recording this figure in 1993. This quarter saw companies that were urgently looking to expand their offices relocate to the Nagoya Higashi area where there were still some vacancies. As a result, the vacancy rate in this area fell by 1.9 points q-o-q. Meanwhile, the central area continued to see strong demand from tenants seeking to expand, and in several cases, tenants were finalized before the spaces were even marketed. The Nagoya Grade A vacancy rate fell by 0.1 point q-o-q to 0.0%, i.e. there is now no space available for lease.

All-Grade rents rose by 1.4% q-o-q to JPY 13,110 per tsubo, while Grade A rents rose by 0.9% q-o-q to JPY 26,900 per tsubo. No new Grade A supply is scheduled for the next five years, meaning that it will remain a landlord’s market. CBRE expects Nagoya Grade A rents to rise by 2.7% over the next year.

Junichi Miyazaki, director of CBRE's Advisory & Transaction Services (Office), Nagoya office, commented: "Space marketed at high-quality buildings is attracting enquiries from multiple potential tenants. This is forcing tenants with urgent relocation needs to seek properties over a wider geographic area."

HIGHLIGHTS FOR REGIONAL CITIES

• Sapporo: Rents reach JPY 14,000 level for first time
• Yokohama: All-Grade vacancy rate reaches historic low at 1.2%
• Fukuoka: Historic high recorded for rents (JPY 15,630); Rents continue to rise sharply at 2.9%

In Q2 2019, the vacancy rate fell q-o-q in six out of the 10 surveyed cities, rose in three cities, and was flat in one city. As well as enquiries to establish new offices, the period saw robust demand from tenants seeking to relocate from the suburbs to the central area to improve their location. In Sapporo, one new building completed this quarter opened almost fully-let as tenants established new offices or moved to increase floor space. Space in Sendai was filled by a call center setting up a satellite office and by other firms establishing new offices, while in Yokohama, relocation to improve building grade or location was focused on the Minato Mirai area. In Kyoto, supply-demand conditions remained tight and the shortage of office space is becoming critical. Tenant activity in Hiroshima was brisk in the Hiroshima Station area where redevelopment is ongoing. Fukuoka continued to see solid demand and widespread requirements from tenants seeking to establish new offices and relocate to increase floor space.

Assumed achievable rents rose in all 10 cities for the sixth consecutive quarter. In Fukuoka, Sapporo, Sendai, and Kyoto, where supply remains extremely tight, assumed achievable rents rose by more than 2% q-o-q. In Sapporo, rents reached the JPY 14,000 level for first time since this survey began recording this figure in 2003, while in Fukuoka, rents continued to record an all-time high. Yokohama, Saitama, Kanazawa, and Kobe also enjoyed rental growth of more than 1%.

■ NATIONWIDE VACANCY RATES AND ASSUMED ACHIEVABLE RENT

^{Source: CBRE, Q2 2019}

■ VACANCY RATES & RENT FORECASTS IN THREE MAJOR CITIES (GRADE A)

^{Source: CBRE, Q2 2019}

■ TOKYO

^{Source: CBRE, Q2 2019}

■ OSAKA

^{Source: CBRE, Q2 2019}

■ NAGOYA

^{Source: CBRE, Q2 2019}

For further details of the market data in each city and an overview of market conditions, refer to Japan Office MarketView Q2 2019.
https://www.cbre.co.jp/en/research-reports/japan-research-archives

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