Japan’s All-Grade Office Vacancy Rates Decline in 11 of 13 Major Cities

Tokyo All-Grade and Grade A Vacancy Rates Fall for 11th Straight Quarter

CBRE released today its Q3 2015 Japan Office MarketView covering market trends for office buildings in 13 cities across the country.

Noteworthy trends

• All-Grade vacancies in Tokyo fell to 3.6%; the 11th straight quarterly decline
• Tokyo Grade A vacancies fell 0.3 points q-o-q to 4.5%; some tenants becoming more cautious
• Osaka Grade A vacancies fell 1.5 points q-o-q to 4.5%; falling below 5% for the first time in six years
• Nagoya Grade A vacancies fell 0.1 points q-o-q to 2.0%; availability remains exceptionally low
• Rental increases recorded in majority of regional cities

■ Tokyo 23 Wards

In Q3, the All-Grade vacancy rate for Tokyo's 23 wards declined by 0.1 points quarter-on-quarter to 3.6%.  Albeit a slight fall, the decline marked the eleventh consecutive quarterly fall. Options for occupiers, especially large spaces, are increasingly limited, and rent levels for Grade A buildings are on an upward trend. Nevertheless, business sentiment has weakened slightly since the summer and some tenants have adopted a more cautious attitude towards relocating. Rental increases that have gathered pace since the start of the year may now be delaying company relocation decisions.

The Tokyo Grade A vacancy rate declined by 0.3 points q-o-q to 4.5%. The period saw relatively large spaces taken up in several Grade A buildings with reasonable rents. Buildings completed in Q2 2015 that still have space available continue to receive plenty of inquiries from companies. There are now very few high-specification buildings with whole floors still available to rent, although compared to previously, it is taking companies slightly longer to sign leases. This is likely because the economic outlook has become somewhat uncertain in recent months. Osaki, an area where rents are more reasonable, showed the sharpest decline in vacancies, falling by 3.0 points q-o-q to 0.4%. In Marunouchi/Otemachi, vacancies fell by 0.2 points q-o-q to 0.2%, the lowest vacancies recorded since December 2008. Grade A assumed achievable rents rose 0.7% q-o-q to JPY 33,850 per tsubo. As the absorption of vacant space slowed in buildings with high rents, the pace of rental increases was also restrained.

"New buildings are seeing plenty of inquiries and there has been no weakening of demand from companies needing to expand," said Hideki Maruyama, executive director of CBRE's Office Services team in Japan. "However, possibly because of changes in the macro environment, tenants are adopting a slightly more cautious approach to relocation. Nevertheless, in some areas, they are looking at buildings that have not yet been completed as there is less space available in existing buildings."

■ Osaka

The Osaka All-Grade vacancy rate declined by 0.3 points q-o-q to 5.8% in Q3 2015. The period saw robust demand for relocation from companies aiming to improve the location or grade of their buildings. Nationwide companies’ local offices and branches, local firms, and overseas companies were all very active. With the help of the healthy Grade A segment, the All-Grade vacancy rate is likely to continue falling in the coming quarters.

The Osaka Grade A vacancy rate declined substantially this quarter, falling 1.5 points q-o-q to 4.6%. This is the first time in six years that the Grade A vacancy rate in Osaka fell below 5%. One significant contributing factor was a foreign company deciding to consolidate their offices and move to a better location. Another contributor was demand from thriving companies seeking to improve their office location and/or grade as they expanded their businesses. Grade A assumed achievable rents reached JPY 20,000 per tsubo for the first time in six and a half years; the last time being Q1 2009. Prior to this quarter, rents had been rising slowly, by around 1%, but due to the recent tightening of the supply/demand balance, rents enjoyed a solid increase of 1.8% q-o-q in Q3 2015. The rate of rental increase is likely to pick up further.

"This quarter is likely to be a major turning point," said Takashi Katono, head of CBRE's Kansai Office. "The Grade A vacancy rate has dropped below 5%, highlighting the dearth of available space. Now that Grade A assumed achievable rents have reached JPY 20,000 per tsubo, more tenants may anticipate further rises in rents and some may want to secure space sooner than later. Market activity is set to pick up further in the coming quarters.”

■ Nagoya

The Nagoya All-Grade vacancy rate declined by 0.6 points q-o-q to 4.4% in Q3 2015. The vacancy rate declined for a seventh consecutive quarter, falling below 5% for the first time since Q4 2007. Relocation was buoyant and was seen in a wide range of buildings. The period saw an increase in inquiries for new or larger offices, mainly from companies whose earnings have improved. There was also firm demand from tenants seeking additional space in their existing buildings. Now that the vacancy rate has fallen below 5%, plans to redevelop obsolete buildings for rent are underway.

The Nagoya Grade A vacancy rate declined by 0.1 points to 2.0% this quarter. Space available for rent has dwindled, including space in large buildings to be completed in Q4 2015. As such, there were very few leases signed. Grade A assumed achievable rents rose 0.5% q-o-q to JPY 21,350 per tsubo. Many existing buildings have already secured tenants to replace those moving to new buildings, meaning that there is also upward pressure on rents for existing Grade A buildings.

"Strong leasing activity in recent quarters means there is now very little space available, including space in large buildings scheduled for completion in Q4," said Takahiro Fujimoto, head of CBRE’s Nagoya branch. "Rents continue to increase and companies considering opening new offices or relocating will have to think more strategically about their choice of building or location."

■ Nationwide

Vacancy rates declined on a quarterly basis in 11 of 13 cities surveyed - Yokohama and Kyoto were the two exceptions. One company in Yokohama that consolidated its offices into a single office in Tokyo was the main reason for the rise in vacancy in Yokohama. Companies are displaying strong demand for new offices and additional space, and there is also relocation demand from companies seeking to expand or to improve their location or office grade. Office demand is increasing nationwide. In Kobe and Hiroshima, relocation from the suburbs or relocation following disposals of owned buildings have pushed down the vacancy rate by at least 1% q-o-q. Buoyant demand for offices may further induce plans for new supply or bring forward the completion dates for existing projects. Cities with no new supply have nowhere to absorb relocations in search of larger offices, and as such, this may stifle tenant activities.

During Q3 2015, assumed achievable rents rose in nine out of the 10 regional cities surveyed by CBRE. In Fukuoka, where the vacancy rate was the lowest of all 13 cities, rents rose fastest, rising 2.0% q-o-q. Rents rose by 0.9% in Kanazawa, mainly in large buildings around Kanazawa Station, and by 0.7% in Sendai, Hiroshima, and Takamatsu.

■Nationwide Vacancy Rates and Assumed Achievable Rent

Source: CBRE, Q3 2015

■Tokyo

Source: CBRE, Q3 2015

■Osaka

Source: CBRE, Q3 2015

■Nagoya

  Source: CBRE, Q3 2015

■Nationwide 10 City Vacancy Rates

Source: CBRE, Q3 2015

■Nationwide 10 City Assumed Achievable Rent

Source: CBRE, Q3 2015

For further details of the market data in each city and an overview of market conditions, please refer to the Japan Office MarketView Q3 2015 which will be released on October 29th and is also available on the CBRE website. www.cbre.com. 

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