CBRE Releases Latest Market Trends for Office Buildings in Japan

Tokyo Grade A Rents Predicted to Fall 3.0% y-o-y 2018 End

Rental Growth in Regional Cities Continues

Tokyo, January 22, 2018 - CBRE today released market trends for office buildings in thirteen cities across Japan.

HIGHLIGHTS FOR MAJOR CITIES

• The Tokyo Grade A vacancy rate fell 0.7 points q-o-q to 1.8%, the third consecutive quarterly decline.

• The Osaka Grade A vacancy rate remained at 0.3% q-o-q, the lowest level since CBRE's surveys began in 2005.

• The Nagoya Grade A vacancy rate fell sharply, declining 2.3 points q-o-q to 2.3%.

RENTAL FORECASTS

• CBRE expects the market to shift in favor of tenants, with Tokyo Grade A rents set to fall by 3.0% by the end of 2018.

• Osaka Grade A rents are forecast to continue rising due to the tight market, increasing by 3.4% by the end of 2018.

• Nagoya Grade A rents are forecast to rise by 1.2% at the end of 2018.

Tokyo 23 Wards

The Tokyo All-Grade vacancy rate decreased by 0.2 percentage points q-o-q to 1.5% in Q4 2017. Solid relocation demand, including from companies seeking to improve their location or building grade, continued to be supported by strong corporate earnings. The Grade A vacancy rate fell 0.7 points q-o-q to 1.8%, the third consecutive quarterly decline. As in Q3 2017, one Grade A building reached completion being fully let this quarter. The property attracted commitments from several tenants, including a major e-commerce firm, which decided to relocate most likely to increase their space and/or improve their grade of building. Elsewhere, a large unit in a newly constructed building in the Marunouchi/Otemachi area was filled by a leading law firm’s relocation. As a result, buildings completed in 2017 are now all fully let.

Grade A rents fell slightly q-o-q in Q4 2017. New supply almost double that of 2017 is slated for completion in 2018, and tenants are now focusing on securing space in upcoming buildings. Some buildings are already scheduled to be completed with high occupancy, with owners now looking to secure large-scale tenants at more competitive lease terms. Some owners are seeking to attract enants by revising rents at newly constructed buildings with unlet space, and even in buildings with high potential for secondary vacancies. Rents in Marunouchi/Otemachi declined further in Q4 2017. CBRE expects the market to continue to shift in favor of tenants, with Grade A rents forecast to fall by 3.0% at end-2018.

Kazutoku Umehara, Senior Director of CBRE's Building Sales division, commented: "Tenants have already been found for more than 60% of the space scheduled for completion in 2018. However, many of these companies are relocating from existing large buildings, making it increasingly likely that secondary vacancies will appear in large units from late-2018. Co-working continues to emerge as a new source of office leasing demand, with a major co-working space provider securing space in several buildings in Tokyo city center in Q4 2017."

Osaka

The Osaka All-Grade vacancy rate declined by 0.2 points q-o-q to 2.5% in Q4 2017. This marked the fourth consecutive quarter where the Osaka All-Grade vacancy had fallen to its lowest level since CBRE began recording this data in Q1 1993. Building spaces continue to be filled, even those with an inferior location or grade, as available space is limited and robust demand among tenants to establish new offices or expand into larger premises remains strong.

The Grade A vacancy rate remained at 0.3%, the lowest level since CBRE's surveys began in 2005. Demand for buildings in prime locations and high-grade buildings remains solid, but there is no available space. Grade A rents rose by 7.9% in the 2017 year, the strongest growth since 2007. The tight supply-demand situation is expected to persist, with Grade A rents projected to rise by a further 3.4% by end-2018.

Junichi Miyazaki, Director of CBRE's Kansai Retail Services team, commented: "It remains extremely difficult for companies to secure space. Rental growth remains solid and the challenging situation for tenants is likely to continue for some time."

Nagoya

The Nagoya All-Grade vacancy rate decreased by 0.8 percentage points q-o-q to 2.6% in Q4 2017, falling below 3% for the first time since Q1 1999. The period saw solid relocation demand, including from companies seeking to improve their location and building grade. During the quarter, one leading retailer decided to move its head office functions from its own building in the suburbs to a newly constructed Grade A building. Large units had remained vacant in this property, which was completed in Q1 2017, but the retailer committed to a space equivalent to 20% of the total leased floor area. As a result, the Grade A vacancy rate fell sharply, declining 2.3 points q-o-q to 2.3%.

The vacancy rate is expected to fall further in the coming quarters, as no new supply is scheduled until 2019. Grade A assumed achievable rents rose by 0.8% q-o-q to JPY 24,550 per tsubo (+4.5% y-o-y). With the supply-demand situation expected to become even tighter, CBRE forecasts that Grade A rents will increase by 1.2% at end-2018 versus Q4 2017.

Hideo Oue, senior director of CBRE's Nagoya Retail Services team, commented: "The decline in space availability is an increasing concern for tenants. Companies planning relocations are advised to monitor the market carefully to ensure they can act quickly when opportunities arise."

Highlights for regional cities

• Kobe: Space continues to be filled, vacancy rate at record low for second quarter running.

• Sapporo: Rise in rents accelerates further.

• Fukuoka: Rent increases to JPY 13,000; growth of 11.1% y-o-y is highest since surveys began.

The vacancy rate fell below 4% across all regional cities this quarter, with the exception of Kanazawa and Takamatsu. Space continued to be filled in buildings across all cities, with declines in the vacancy rate exceeding 1.0 points q-o-q in Kanazawa, Kobe, and Takamatsu. Relocation demand, both to increase floor space and improve location/building facilities, remains solid. However, in almost all cities, space is significantly short of requirements. As there will be limited new supply in the coming quarters, the tight supply-demand situation is expected to continue.

Rents rose in all cities in Q4 2017, with increases gaining momentum alongside improved building occupancy rates. In Sapporo and Fukuoka, rents rose in excess of 2% q-o-q for the second consecutive quarter. Rental growth also exceeded 2% q-o-q in Saitama and Hiroshima, the strongest rate of growth since 2007. Full year rental growth in Fukuoka was 11.1%, the first double-digit growth since surveys began. Continued buoyant demand will ensure further rental growth in 2018.

For further details of the market data in each city and an overview of market conditions, please refer to the Japan Office MarketView Q4 2017 released on January 30th, which is also available on the CBRE website.

http://www.cbre.co.jp/EN/research/Pages/MarketViews.aspx