Expansions and upgrades across industries continue to drive office demand

Grade A rents in Marunouchi/Otemachi up 3.8% q-o-q

​More regional cities see rent rising by more than 1%

CBRE announced today that expansions and upgrades across industries continue to drive office demand, as reported in its Q2 2015 market survey for office buildings across 13 Japanese cities.

[Noteworthy trends]

• Tokyo all-grade vacancy rate fell 0.2 points quarter-on-quarter to 3.7%
• Tokyo Grade A vacancy rate declined again, falling 0.3pts q-o-q to 4.8%
• Osaka Grade A vacancy rate fell sharply, declining 1.1pts q-o-q to 6.1%
• Nagoya Grade A vacancy rate fell 0.7pts q-o-q to 2.1%
• Rents rose in nearly all other regional cities

■Tokyo 23 Wards

The Tokyo 23 wards all-grade vacancy rate fell 0.2pts q-o-q to 3.7%. Expansionary demand, which has picked up since early spring, was seen across most industries.  This was particularly noticeable among foreign firms, with exception to those in the finance industry. An increasing number of companies are considering relocation for expansion and/or upgrade, including taking additional space within their existing premises.

There has been an increase in inquiries for the few remaining buildings priced below market level, and these contracts are rapidly closing. Meanwhile, large buildings with above-market rents completed this year are also steadily being filled.

The Tokyo Grade A vacancy rate fell 0.3pts q-o-q to 4.8%, with the absorption largely occurring at recently completed buildings, and existing buildings with secondary vacancies.

Four buildings completed in Q2 had rents above market level and all but one had vacancies upon completion. Virtually all existing buildings have no vacancies, and tenants looking to secure a whole floor in a building with state-of-the-art facilities are generally limited to new buildings. As a result, it is unlikely that space in these newly completed buildings will remain vacant for long. By area, the vacancy rate in Marunouchi/Otemachi fell 0.6pts q-o-q to 0.4%, and in Shibuya/Ebisu by 4.9pts to 0.2%, leaving almost no available space in these areas. In the Roppongi/Akasaka and Shinjuku areas, supply is also tight with the vacancy rate at 1.7% and 1.9%, respectively.

Grade A assumed achievable rent rose 2.0% q-o-q to ¥33,600 per tsubo. The rise was driven by the most expensive Marunouchi/Otemachi area, where the Grade A rents rose as much as 3.8% q-o-q to ¥45,450 per tsubo.

"Requirements for additional floor space are growing across virtually all industries, and building inquiries have increased further since starting to rise in early spring,” said Hideki Maruyama, executive director of CBRE's Office Services team.  “Tenants are beginning to accept the market trend of falling vacancy rates and rising rents, and since space is now scarce at existing buildings, the focus is increasingly shifting to newly completed buildings where rent levels are high. Companies reporting earnings for the year to March have now concluded their shareholder meetings, and backed by strong financial results, many will be looking to go on the offensive."

■Osaka

The Osaka all-grade vacancy rate fell 0.2pts q-o-q to 6.1%. Grade A continued to lead the fall in the overall market vacancy rate during the quarter. Relocation demand remains solid, mainly prompted by the desire to upgrade location and/or building grade. Demand is strong, not just from company branches which represents core demand in Osaka, but also from companies based here. The market remains buoyant and will soon be approaching 5% vacancy, beyond which is widely regarded to be a landlords market.

The Osaka Grade A vacancy rate fell 1.1pts q-o-q to 6.1%. The movements of profitable companies to expand operations and upgrade locations and/or building grade has spurred demand. Assumed achievable rent rose 0.8% q-o-q to JPY19,650 per tsubo. While the pace of these increases has been gradual, rents have been on a rising trend for seven quarters in a row. As supply is now tighteing, assumed achievable rent could reach the JPY20,000 mark within the upcoming quarters.

"Activity among tenants appeared to be lackluster in late 2014, but picked up as we moved into 2015 and the pace appears to be quickening with each quarter,“ said Takashi Katono, head of CBRE’s Kansai Office.  “The Grade A vacancy rate fell to as low as 6.1% and it's only a question of time before it falls below the 5% level, beyond which supply will be tight. If the vacancy rate continues to fall at this pace, the rise in rents will become firmly established."

■Nagoya

The Nagoya all-grade vacancy rate dropped 0.2pts q-o-q to 5.0%. The vacancy rate has decreased for six consecutive quarters, and looks set to fall below the 5% level soon. Firms continue to open new offices and grow their operations, and demand for office space through expansion within the existing premises is also solid. In addition, there are continued cases of companies relocating from the suburbs to the city center where hiring conditions are favorable. Companies across a wide range of sectors are seeking office space, and in all sectors the top-ranking companies by revenue are especially proactive.

The Nagoya Grade A vacancy rate fell 0.7pts q-o-q to 2.1%. The key drivers include relocation from the suburbs and tenants who have frequent visitors to their workplaces establishing new offices.  With that said, demand is largely concentrated on the Meieki station area. Grade A assumed achievable rent was JPY21,250 per tsubo, down JPY200 q-o-q. Rents at existing buildings, which had been much above market level, are undergoing some adjustment, being benchmarked against the large-scale buildings scheduled for completion later in the year.

“Demand remains solid and vacancy rates are low, reflecting the tight supply-demand balance across all grades,” said Takahiro Fujimoto, head of CBRE's Nagoya branch.  “Going forward, tenants planning to relocate will need to act quickly."

■Nationwide

Vacancy rates fell in 12 of the 13 surveyed cities compared with the previous quarter, with the exception of Kyoto. In addition to taking more space within existing premises, office demand grew on the back of an inflow of tenants from the suburbs and locations outside of office districts. In Yokohama, Kanazawa and Fukuoka, there were moves to secure large amounts of space, and the vacancy rates fell by more than 1 point q-o-q. In cities where there are no near-term plans for new supply and vacancy rates are under 5%, there are concerns that this could lead to pent-up office relocation demand.

Assumed achievable rents rose in eight out of 10 cities, except Kyoto and Takamatsu. In Sapporo and Fukuoka, where vacancy rates are at 3%, the q-o-q rise was as much as 1.9% and 1.5%, respectively. In Kanazawa, where the vacancy rate continues to fall following the opening of the Hokuriku Shinkansen, rents rose by 1.5% q-o-q, and Kobe and Hiroshima also saw an increase of 1.1%. As such, the accelerating pace of rent increases is becoming more pronounced in many of the markets. In the Greater Tokyo area, rents continued to rise across all grades in Tokyo, and there were also continued increases in Saitama and Yokohama.

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Press Release
JOMV Q2 2015 Full Report

For further details of the market data in each city and an overview of market conditions, please refer to the Japan Office MarketView Q2 2015 released on July 30th, which is also available on the CBRE website. www.cbre.co.jp.

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