CBRE releases Q3 2019 Japan Office MarketView

All-Grade Vacancy Rate Under 1% in Eight of Japan's Major Cities

CBRE today released its Q3 2019 Japan Office MarketView covering market trends in office buildings in 13 cities across Japan.

HIGHLIGHTS FOR MAJOR CITIES

• Tokyo Grade A vacancy rate fell 0.1 point q-o-q to 0.7%. All-Grade vacancy rate is unchanged at 0.7%.
• Osaka All-Grade vacancy rate fell below the 1% mark for the first time, down 0.3 points q-o-q to 0.9%.
• Nagoya Grade A vacancy rate rose 0.1 point q-o-q to 0.1%.

CBRE RENTAL FORECAST (Q3 2019 – Q3 2020)

• Tokyo Grade A rents: Forecast to fall by 2.9% over the next year
• Osaka Grade A rents: Forecast to rise by 4.3% over the next year
• Nagoya Grade A rents: Forecast to rise by 2.6% over the next year

■ Tokyo 23 Wards
The Tokyo All-Grade vacancy rate was unchanged at 0.7% in Q3 2019. Secondary vacancy arose at some existing buildings, while a small amount of vacant spaces remained in three out of the 10 new buildings completed this quarter. The period also saw several large units being filled by group companies consolidating premises and by companies establishing new offices. Coworking operators were also active, securing space totaling over 8,000 tsubo.

While there remains strong demand among companies to relocate to larger premises and to establish new offices, CBRE has also observed some tenants considering relocation to relatively inexpensive areas/buildings to avoid substantial rent hikes upon renewal. Several examples of this was seen this quarter. At the same time, in areas where rents are comparatively high, space vacated by tenants have begun to appear on the market. In the Marunouchi/Otemachi area, the Grade A vacancy rate rose by 0.6 points q-o-q.

Tokyo All-Grade rents rose 1.7% q-o-q to JPY 22,870 per tsubo and Grade A rents also rose by 1.1% q-o-q to JPY 38,350. Although rents are rising in areas where they are lower than prevailing market levels, rents were flat in the Marunouchi/Otemachi area.

Around 200,000 tsubo of new Grade A office space is scheduled for completion in 2020. As of September 2019, pre-leasing was progressing well, with the tenant pre-lease ratio exceeding 80%. However, many tenants signing pre-leases are relocating from existing buildings. Amid growing risk of a slowdown or downturn in the domestic economy, secondary vacancy has already started to emerge, a trend that is expected to continue in future. CBRE therefore expects Grade A rents to decline by 2.9% over the next year.

Takashi Katono, executive director of CBRE's Advisory & Transaction Services (Office), commented: “Buildings where tenants have decided to relocate to a new property have seen a lull in existing tenants taking up the vacant space. Landlords of buildings with a less central location or average facilities are now offering reasonably long rent-free periods to secure replacement tenants."

■ Osaka
The Osaka All-Grade vacancy rate stood at 0.9% in Q3 2019, the first time it has fallen below 1% since CBRE's surveys began recording this figure in 1993. The quarter saw many tenants looking to secure a space, regardless of location or grade. As a result of the increasingly tight market conditions, All-Grade rents rose to the JPY 13,500 – JPY 14,000 level for the first time since 2008, and are now not far from the historical high of JPY 14,080 recorded in Q1 2008.

The Osaka Grade A vacancy rate rose by 0.1 point q-o-q to 0.3%. Despite the slight q-o-q increase, tenant enquiries are extremely brisk at present, with vacancy that arose this quarter expected to be filled quickly. Osaka Grade A rents rose by 1.8% q-o-q to JPY 25,650 per tsubo. Amid tightening supply-demand conditions, rents are likely to climb further in the coming quarters. CBRE forecasts an increase in Grade A rents of 4.3% over the next year.

Hideo Oue, senior director of CBRE's Advisory & Transaction Services (Office), Kansai office, commented: "Several new development plans have emerged in recent months, with building completion scheduled around the mid-2020s. While this will not alleviate demand from tenants with immediate space requirements, this comes as good news for tenants planning their long-term Osaka office strategy. Until recently, there had been no prospect of the current space shortage being resolved, but there are now signs of change."

■ Nagoya
The Nagoya All-Grade vacancy rate was unchanged at 0.9% in Q3 2019. Several small-scale units became vacant, while at buildings with large units available, space was filled by tenants consolidating premises or being obliged to vacate their existing building. While there is strong demand among tenants to upgrade facilities and move into larger premises, there remains a shortage of available space. As a consequence, buildings completed this quarter opened at almost full occupancy. Even at one building where the lease of a large unit was terminated due to the tenant relocating to a company-owned building, potential tenants were quick to respond to the availability.

Nagoya All-Grade rents rose by 2.8% q-o-q to JPY 13,480 per tsubo this quarter. Grade A rents rose by 1.5% q-o-q to JPY 27,300 per tsubo, with the historical high of JPY 27,350 set in Q4 2007 likely to be surpassed within the year.

Since there will continue to be very little new supply in Nagoya, market conditions are poised to remain tight. CBRE therefore expects a 2.6% rise in Grade A rents over the coming year.

Junichi Miyazaki, director of CBRE's Advisory & Transaction Services (Office), Nagoya office, commented: "Occupier demand remains solid. When the occassional space opens up and enters the market, multiple tenants are quick to respond and competition is fierce."

HIGHLIGHTS FOR REGIONAL CITIES

• Yokohama: Vacancy rate stands at 0.8%, falls under 1% for the first time
• Kanazawa: Vacancy rate registered at 4.7%, a record low
• Hiroshima: Vacancy rate edged lower to 2.1%, a record low

On a q-o-q basis, in Q3 2019, the vacancy rate fell in five out of the 10 surveyed regional cities, rose in three cities, and remained flat in two. Consequently, the All-Grade vacancy rate came at under 1% in eight out of 13 cities nationwide, including Tokyo, Osaka, and Nagoya.

In regional cities, space continued to be filled on the back of strong demand from tenants to establish new offices or expand into larger premises. In Sapporo, space is expected to be steadily filled by tenants establishing new offices or satellite offices, despite a slight rise in the vacancy rate. In Yokohama, the vacancy rate fell to below 1% for the first time on record, mainly due to manufacturers establishing new offices or taking up additional space within their existing building, namely in the Minato Mirai area. This caused a drop in the vacancy rate. In Kanazawa, a large unit was filled by a construction-related firm setting up a satellite office (albeit on a short-term lease) which prompted the vacancy rate to hit the lowest level since CBRE’s survey began recording this figure. Even in Hiroshima, the vacancy rate is now at its lowest level since surveys began. Vacant space at a new building completed in Q1 2019 this year was also steadily filled. Similarly in Kobe and Fukuoka, the period saw widespread requirements for new offices and larger premises, and brisk leasing activity. In Fukuoka, while the period saw strong demand among tenants to set up new offices or relocate to increase floor space, there were some cases of tenants avoiding buildings with rents diverging significantly from the prevailing market level, leading to prolonged vacancy.

Assumed achievable rents rose in all 10 cities for the seventh consecutive quarter. Market conditions remained extremely tight in Kyoto, where the period saw a 3.1% q-o-q rise in assumed achievable rents, the highest rate of increase among the 10 cities and also a record high for that market. In Sendai, assumed achievable rents hit the JPY 11,000 level for the first time in 10 years. In Sapporo, Saitama, Kanazawa, and Fukuoka, assumed achievable rents again rose to a record high this quarter.

■ NATIONWIDE VACANCY RATES AND ASSUMED ACHIEVABLE RENT

^{Source: CBRE, Q3 2019}

■ VACANCY RATES & RENT FORECASTS IN THREE MAJOR CITIES (GRADE A)

^{Source: CBRE, Q3 2019}

■ TOKYO

^{Source: CBRE, Q3 2019}

■ OSAKA

^{Source: CBRE, Q3 2019}

■ NAGOYA

^{Source: CBRE, Q3 2019}

For further details of the market data in each city and an overview of market conditions, refer to Japan Office MarketView Q3 2019.
https://www.cbre.co.jp/en/research-reports/japan-research-archives

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