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The press release below has been corrected.
Tokyo, December 20, 2016 - Tokyo’s office market will experience a moderate downward trend in 2017, on the back of a weaker earnings outlook in Japan, a strong Japanese yen and the risk of overcapacity, according to CBRE Research. In the 2017 Japan Real Estate Market Outlook, CBRE’s annual outlook of Japan’s office, logistics, and real estate investment market, broader real estate investment may see marginal increase next year, as profit taking by investors may gain momentum.
CBRE Research expects Tokyo office rents to shift to a moderate downward trend from 2H 2017. While the Greater Tokyo logistics market continues to see stable demand, new supply remains significant, and has already led to rise in vacancy rates in some areas.
Positive stimuli run up by an incoming U.S. Presidential administration suggests that risk is on the upside in demand for leasing spaces. These could include tax cuts and infrastructure investments, as suggested by the president-elect during his campaign. According to CBRE, the pace of pre-leasing activity for offices slated for completion in Tokyo in the coming quarters will be an important indicator of any changes in the market sentiment.
Office Market
All major cities saw a decline in vacancy rate in 2016. Office leasing demand was solid with new openings and expansions, however, regional cities, where new supply is generally limited, are seeing muted leasing activity due to a lack of space.
In Tokyo, new supply for All Grades over the next two years will be in line with the 10-year historical average of 180,000 tsubo. However, for Grade A spaces only, new supply in 2017 and 2018 will be 40% higher than the past average. It is already taking longer for buildings to lease-up, particularly those offering above-market rents such as new Grade A buildings. We expect Tokyo Grade A rents to peak in 2017 and shift to a moderate downward trend. We forecast rents at the of end-2018 to be down 1.0% compared to end-2016.
Regional cities are continuing to see strong demand including new openings and expansions. However, the tightness in most of these markets is becoming severe due to limited new supply. In particular, Sapporo, Kyoto, and Fukuoka have marked record low vacancy rates at around 1% in recent quarters. Vacancy rates are expected to remain low or decline further in most regional cities, with rents expected to continue their upward trend over the next two years.
Logistics Market
Demand for logistics facilities continued to grow in 2016, however, in the Greater Tokyo and Greater Osaka areas, new supply outpaced demand. Consequently, average vacancy rates rose over the course of the year in both areas. That said the gap between supply and demand did not widen in either region.
In the Greater Tokyo Area, the vacancy rate in the developing Ken-O-do Area is expected to hit around 20% at the end of 2016 and rise further as the location will see a continued concentration of new supply in the coming years. While the vacancy rates in the three other Greater Tokyo Areas (the Tokyo Bay, Gaikando, and Route 16 areas) also rose in H2 2016, they remained below 10% and are unlikely to rise much further.
The logistics market in the Greater Osaka Area is also seeing divergent trends between the inland and bay areas. On one hand, in the inland area, the number of development projects is increasing and the market remains tight. On the other, the bay area, which has been a key logistics market in the Greater Osaka Area for a long time, is seeing its demand softening. New supply is due to increase in both areas in the coming years, and the supply and demand balance between the two areas is likely to widen.
Investment Market
Investors retained a strong appetite for real estate in 2016, but the total value of acquisitions will likely be JPY 2.76 trillion, down 25% y-o-y. This is due to a lack of availability of properties for sale, especially in central Tokyo. Nevertheless, with a view to slower rental growth, more investors could seek to dispose of properties acquired earlier in the cycle in order to realize gains. Meanwhile, investors seeking higher yields may increasingly focus on regional cities, where current tight leasing markets will likely remain. CBRE Research forecasts that total investment volume in 2017 will be around JPY 2.8 trillion, up 3% y-o-y. Real estate investment will continue to be seen as a relatively stable investment alternative and investors’ appetite should be solid over the course of the next 24 months.
Forecast data and a detailed discussion of market conditions for each sector can be found in the 2017 Japan Real Estate Market Outlook which is attached below.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.co.jp
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