Tokyo Grade A vacancy falls for second consecutive quarter

Rent increase in regional cities accelerate

Tokyo, October 23, 2017 - CBRE today released market trends for office buildings in thirteen cities throughout Japan for Q3 2017.

HIGHLIGHTS FOR MAJOR CITIES

• Tokyo Grade A vacancy fell 1.2 points quarter on quarter (q-o-q) to 2.5%, the second consecutive quarterly decline
• Osaka Grade A vacancy declined by 0.2 points q-o-q to 0.3%, the lowest level since 2005 when CBRE's surveys began
• Nagoya Grade A vacancy rate remained flat q-o-q at 4.6%

CBRE RENT FORECASTS UP TO END-2018

• Tokyo Grade A rents forecast to peak in H2 2017 and fall 6.2% by end-2018
•  Osaka Grade A rents forecast to rise faster, and expected to rise by 3.9% by end-2018
•  Nagoya Grade A rents forecast to fall by 1.6% by end-2018

Tokyo 23 Wards

The Tokyo All-Grade vacancy rate decreased by 0.5 percentage points q-o-q to 1.7% in Q3 2017. The earnings outlook is favourable in many sectors, and office expansion demand also remains solid. With the labour shortage increasingly severe, many companies are seeking offices in locations that are easily accessible by transport, which makes it easier to attract staff. In addition, more companies are seeking space in higher grade buildings to enhance employee satisfaction. At the same time, companies remain cost sensitive. As a result, while office demand is buoyant overall, there are now signs of rents peaking in the prime category.

The Grade A vacancy rate fell 1.2 points q-o-q to 2.5%, the second consecutive quarterly decline. One Grade A building was completed fully let. Large tenants moving into this building included a major communications firm relocating to make way for renovation in its previous building. Leasing was brisk in part due to the its asking rent being slightly lower than the prevailing level for new properties. Grade A assumed achievable rents stood at JPY 36,500, an increase of 0.6% q-o-q. Rents fell in the Marunouchi/Otemachi area, albeit moderately by 0.1% q-o-q, after landlords adjusted their somewhat bullish rents.

Strong office demand should ensure the All-Grade vacancy rate continues to decline. However, around 750,000 tsubo of office space will come onto the market between 2018 and 2020, primarily in the Grade A category. As vacancy could well arise in existing buildings vacated by tenants relocating to newly constructed buildings, the range of options for tenants seeking to relocate is set to increase. At the same time, the intense competition among landlords seeking to attract tenants may prompt some owners to review the rental terms at certain buildings. CBRE forecasts that Grade A rents will peak in 2H 2017 and continue to gradually fall thereafter. Grade A rents are forecast to fall 6.2% by end-2018 (compared to Q3 2017 actual).

Kazutoku Umehara, senior director of CBRE's Advisory & Transaction Services (Office), commented: “Office demand remains buoyant. Companies are seeking space in buildings scheduled for completion next year and beyond. In addition, some companies are competing for potential vacancy in existing buildings vacated by tenants who are due to move to newly constructed buildings. That said, the increase in new supply is likely to result in some buildings taking longer to find tenants.”

Osaka

The Osaka All-Grade vacancy rate declined by 0.2 points q-o-q to 2.7% in Q3 2017. For the third consecutive quarter, the vacancy rate hit the lowest level since CBRE's surveys began in Q11993. One Grade A building was completed fully let during the period. Tenants have already been found for the building vacated by tenants relocating to the newer property. Demand for new offices and expansion of floor space remains strong.

The Grade A vacancy rate declined by 0.2 points q-o-q to 0.3% in Q3 2017, the lowest level since Q12005, when CBRE's surveys began. Almost all Grade A buildings are fully let, meaning that tenants are finding it extremely difficult to relocate to higher grade buildings. Grade A assumed achievable rents rose 1.9% q-o-q to JPY 21,800 per tsubo, significantly outpacing the rate of growth in Tokyo and Nagoya for the third consecutive quarter.

Junichi Miyazaki, director of CBRE's Advisory & Transaction Services (Office), Kansai office, commented: “Tenants requiring space in the short term are advised to quickly secure space, significantly relax their building requirements and accelerate their decision-making processes for relocation.”

Nagoya

The Nagoya All-Grade vacancy rate was flat at 3.4%. There had been fears that significant vacancy would arise in older buildings whose tenants had moved to the Grade A building that was completed in Q1 2017, but this scenario has not materialised. In buildings with large floor plates, tenants were observed to be consolidating floors or relocating to increase floor space. Several companies moving out of their building to make way for renovation also sought to upgrade their location.

The Nagoya Grade A vacancy rate was flat at 4.6% as it took some time to let one of the two Grade A buildings completed in Q1 2017, in which a few large units were remaining. Grade A assumed achievable rents rose 0.6% q-o-q to JPY 24,350 per tsubo. Only a few buildings still had unlet space this quarter, mainly due to tenants expanding within their existing building, which resulted in an increase in asking rents.

Hideo Oue, senior director of CBRE's Advisory & Transaction Services (Office), Nagoya branch office, commented: “Impact of new Grade A buildings is limited as older buildings manage to lease-up their vacated spaces. The increase in occupancy is even tightening the supply-demand for car parks.”

Highlights for regional cities

• Kanazawa  Rents rises above JPY 10,000 for the first time in nine years
• Kyoto   Rate of increase in rents the highest nationwide
• Fukuoka  Rise in rents accelerates

The vacancy rate fell below 5% across all regional cities in Q3 2017, apart from Takamatsu and Kanazawa. Demand is solid, but lack of space meant reduction in the number of actual relocations. In Saitama, Sapporo, Kyoto and Fukuoka, where the vacancy rate is already below 1%, the shortage of space is particularly severe. As there is limited new supply in almost all cities, the tight supply-demand situation is expected to continue for some time. Meanwhile, in Yokohama, a new building was completed with some space unlet, leading to a sharp rise in the vacancy rate.

Assumed achievable rents rose in all cities with the exception of Takamatsu. In Kyoto and Fukuoka, the pace of increase in rents further accelerated, exceeding 3% q-o-q. In Sapporo, the rate of increase exceeded 2% q-o-q, while rental growth also exceeded 1% q-o-q in Yokohama, Saitama, Sapporo, Kanazawa and Hiroshima. In many regional cities, rents are rising at an increasingly rapid pace.

Market data and detailed discussion of market conditions for each city can also be found in the Q3 2017 Japan Office MarketView published on October 30 or on the CBRE website.

http://www.cbre.co.jp/EN/research/Pages/MarketViews.aspx?redirect=true

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Press Release
Japan Office MarketView Q3 2017

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