CBRE releases Q1 2020 Japan Office MarketView

Rents Rise Nationwide but Growth Momentum Weakens in Some Cities

CBRE today released its Q1 2020 Japan Office MarketView covering market trends in office buildings in 13 cities across Japan.

HIGHLIGHTS FOR MAJOR CITIES

• Tokyo All-Grade vacancy rate falls to 0.6%, matching the historical low recorded in Q1 2019
• Osaka All-Grade vacancy rate falls by 0.1 point q-o-q to 0.7%
• Nagoya All-Grade vacancy rate rises by 0.3 points q-o-q to 1.0%

■ Tokyo 23 Wards
The All-Grade vacancy rate fell by 0.1-point q-o-q to 0.6% in Q1 2020, reaching the same level as the historical low recorded in Q1 2019. However, beginning in March 2020, the effect of COVID-19 has gradually began to impact office market activity. Several companies have postponed relocation decisions, while others have delayed the establishment of new offices. In selected cases, a few new leases have been canceled.

However, there remains strong demand among companies for larger premises and new offices associated with business diversification, particularly among IT firms. The quarter also saw several large units being filled, mainly driven by: new leases led by manufacturers relocating; firms forced to move to make way for the redevelopment of their previous building; and financial institutions wanting to consolidate their operations and improve their location. Pre-leasing of a Grade A building currently under construction was also brisk.

New supply of just under 200,000 tsubo and around 50,000 tsubo is scheduled for completion in 2020 and 2021, respectively, with estimated pre-leasing ratios standing at just over 90% and 60%, respectively, as of March 31, 2020.

However, assuming that COVID-19 will peak out in Q2, rents are likely to see a moderate downward trend in the coming quarters.

Takashi Katono, executive director of CBRE's Advisory & Transaction Services (Office), commented: "There continues to be strong demand from occupiers seeking to move to larger premises or upgrade their office space. However, the spread of COVID-19 has led to more cases of companies postponing or canceling relocations and expansions, particularly among firms in sectors related to retail, tourism, and events. This trend could spread to other sectors if the outbreak is not quickly contained."

■ Osaka
The Osaka All-Grade vacancy rate fell by 0.1 point q-o-q to 0.7% in Q1 2020, while All-Grade rents stood at JPY 14,610 per tsubo, a rise of 3.3% q-o-q. However, the escalation of the COVID-19 outbreak in March has led to a gradual increase in the number of relocation plans being reviewed or postponed, and there is a growing possibility that tenant activity will slow.

Nevertheless, new supply in Osaka will remain limited in 2020 and 2021, with just 10,000 tsubo of new space expected to be completed in each year. Amid these extremely tight supply-demand conditions, occupiers that had previously experienced severe space shortages are unlikely to immediately reduce their floor area. CBRE therefore expects the vacancy rate to remain flat. While rents will continue to rise, the rate of growth is likely to slow as there will be less urgency among tenants to lease space.

Hideo Oue, senior director of CBRE's Advisory & Transaction Services (Office), Kansai office, commented: "The spread of COVID-19 has led to an increasing number of companies reviewing or postponing their relocation plans. Leasing activity could weaken in the event of a protracted outbreak."

■ Nagoya
The Nagoya All-Grade vacancy rate rose by 0.3 points q-o-q to 1.0% in Q1 2020. During the quarter, one large unit became vacant at a Grade A building. However, as it was not filled internally, it was marketed to external tenants. Demand for large units has weakened slightly since last year, particularly among manufacturers, with large-scale vacancies taking longer to fill. However, spaces of around 50 tsubo are attracting many enquiries, with several vacancies in buildings in the Sakae area filled this quarter.

Grade A rents rose by 1.4% q-o-q to JPY 28,200 per tsubo, surpassing the record high set last quarter, and marking the highest level since CBRE's survey began recording this figure in 2005. Many buildings remain at full-occupancy and the market continues to favor landlords. Although the impact of the spread of COVID-19 is limited at present, several companies have postponed or canceled relocations. If the outbreak is protracted, tenants could be forced to review their office footprint and leasing requirements, which may impact office demand.

Junichi Miyazaki, director of CBRE's Advisory & Transaction Services (Office), Nagoya office, commented: "CBRE has observed several cases of companies suspending or delaying relocation plans due to the spread of COVID-19. However, we have also seen the emergence of new demand in the form of companies seeking to diversify their office footprint in order to hedge risk."

HIGHLIGHTS FOR REGIONAL CITIES

In Q1 2020, the All-Grade vacancy rate fell on a q-o-q basis in six out of the 10 surveyed cities (Sapporo, Saitama, Yokohama, Kobe, Hiroshima, Fukuoka) and rose q-o-q in three cities (Sendai, Kanazawa, Takamatsu), and was flat q-o-q in one city (Kyoto). Space was occupied across a wide range of sectors as several companies relocated to increase floor space or to establish new offices, ensuring supply-demand conditions remained tight.

Assumed achievable rents rose in all cities on a q-o-q basis, with rents in six out of the 10 cities reaching their highest levels since surveys began in 2003. Rents continue to rise in many cities, with buildings in which rents had been lower than the local market level recording steady gains.

Although several regional cities have seen some companies postpone decisions regarding relocations and the establishment of new offices due to the spread of COVID-19, the impact on the office market has been limited. There have been very few cancelations of relocations or new office set ups, and no cancelations of existing leases.

■ NATIONWIDE VACANCY RATES AND ASSUMED ACHIEVABLE RENT

^{Source: CBRE, Q1 2020}

■ TOKYO

^{Source: CBRE, Q1 2020}

■ OSAKA
^{Source: CBRE, Q1 2020}

■ NAGOYA

^{Source: CBRE, Q1 2020}

For further details of the market data in each city and an overview of market conditions, refer to Japan Office MarketView Q1 2020.
https://www.cbre.co.jp/en/research-reports/office-reports

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