CBRE releases Q4 2019 Japan Office MarketView

Tokyo Vacancy Rate Below 1% Across All Grades; Rents Rise in All Cities

CBRE today released its Q4 2019 Japan Office MarketView which covers office market trends in 13 cities across Japan.

HIGHLIGHTS FOR MAJOR CITIES

• Tokyo All-Grade vacancy rate remains unchanged for two consecutive quarters at 0.7%
• Osaka All-Grade vacancy rate falls by 0.1 point q-o-q to 0.8%, the lowest since the survey began recording this figure in 1993
• Nagoya All-Grade vacancy rate falls by 0.2 points q-o-q to 0.7%

CBRE RENTAL FORECAST (Q4 2019 – Q4 2020)

• Tokyo Grade A rents: Forecast to fall by 0.5% over the next year
• Osaka Grade A rents: Forecast to rise by 4.1% over the next year
• Nagoya Grade A rents: Forecast to rise by 1.9% over the next year

■ Tokyo 23 Wards
In Q4 2019, the All-Grade vacancy rate stood at 0.7% for the second consecutive quarter. The period saw companies continuing to relocate, moving into larger premises as their businesses diversify, or moving to improve location - a trend particularly common among IT-related firms. As leading manufacturers consolidated bases or relocated due to reconstruction, several Grade A large units completed this quarter were filled, as well as at relatively new buildings where there had been vacancies. Nevertheless, it may take some time for the resulting secondary vacancies to be filled.

Tokyo All-Grade rent stood at JPY 23,150 per tsubo, a rise of 1.2% q-o-q. The rate of increase for full-year 2019 was 4.2%. Grade B rent rose by 1.5% q-o-q and by 5.6% over the full year, the highest rate of increase among all grades.

New supply totaling 300,000 tsubo is slated for 2020, the second highest annual total after the 350,000 tsubo recorded in 2003 (the highest since surveys began monitoring this in 1991). At Grade A buildings, which account for 195,000 tsubo (65%) of new supply due for completion in 2020, the tenant pre-leasing ratio as of December 2019 is estimated at around 90%. However, many of the tenants signing pre-leases appear to be relocating from existing buildings. Amid concerns about the economic outlook, secondary vacancies could arise at some existing properties in the coming quarters. CBRE sees rents falling 0.5% over the next year along with a slight increase in the Grade A vacancy rate through H2 2020.

Takashi Katono (Executive Director, Office, Advisory & Transaction Services, CBRE K.K.) commented: "There remains strong demand among tenants to move to larger premises or improve their office environment. However, at some buildings, there appears to be a gap in rental expectations between landlords and tenants, meaning that it can take some time to fill vacant spaces. At low grade buildings in non-central locations, landlords are offering reasonably long rent-free periods or fully furnished units in order to quickly secure replacement tenants."

■ Osaka
The Osaka All-Grade vacancy rate stood at 0.8% in Q4 2019, the lowest level since CBRE's surveys began recording this figure in 1993. Across all sectors there remains solid demand for establishing new offices and expanding into larger premises. Amid very little space availability, companies are increasingly deciding to relocate early on, regardless of location or grade. The tight market conditions have pushed up All-Grade rent to its highest level in 11 years, an uptrend that looks set to continue for the time being.

The Osaka Grade A vacancy rate was 0.2% in Q4 2019, a record low for this survey (since 2005). Tenant enquiries are extremely brisk, and any vacancies that arise are filled very quickly. Osaka Grade A rent stood at JPY 25,950 per tsubo, a rise of 1.2% q-o-q, while the rate of increase for full-year 2019 was 8.8%. Amid tightening supply-demand conditions, rents are likely to climb up further in the coming quarters. CBRE forecasts an increase in Grade A rent of 4.1% over the next year.

Hideo Oue (Senior Director, Office, Advisory & Transaction Services, CBRE K.K.) based in CBRE’s Kansai office commented: "With almost no vacant space currently available, many companies are opting to relocate, irrespective of location or grade, provided that the rent is not significantly different from the prevailing market level. This trend is pushing up rents in Osaka."

■ Nagoya
The Nagoya All-Grade vacancy rate declined by 0.2 points q-o-q to 0.7% in Q4 2019, setting a record low. While there remains robust demand among tenants to establish new offices or relocate to larger premises, there continues to be a lack of available space. In some cases, companies that are unable to take additional space within their existing building have considered setting up satellite offices or moving to other areas. At buildings where leases of large units were canceled last quarter, replacement tenants have already been found for 40% or more of the space.

Grade A rent stood at JPY 27,800 this quarter, up by 1.8% q-o-q, the highest level since 2005 when CBRE's surveys began monitoring this figure. The rate of increase over full-year 2019 was 5.1%. Reflecting the tight supply-demand conditions, rents were raised at some Grade A buildings that had been inexpensive relative to the local area. Given the scarcity of new supply, it is likely to remain a landlord’s market for the time being. CBRE forecasts a 1.9% rise in Grade A rent over the next year.

Junichi Miyazaki (Director, Office, Advisory & Transaction Services, CBRE K.K.) from the Nagoya branch, commented: "Buildings scheduled for completion in 2020 are close to being fully pre-committed. With very few secondary vacancies likely to arise at existing properties, the market looks set to remain tight."

HIGHLIGHTS FOR REGIONAL CITIES

• Sapporo: Vacancy rate falls by 0.4 points q-o-q to 0.5%
• Kanazawa: First new building in five years completed almost fully let
• Hiroshima: Vacancy rate at 1.9%, below 2% for first time since 2001 (survey record low)

In Q4 2019, compared to the previous quarter, the vacancy rate fell in four out of the 10 surveyed cities, rose in three cities, and was flat in three. The All-Grade vacancy rate stood 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 ongoing strong demand from tenants looking to establish new offices or expand into larger premises. In Sapporo, vacancies that arose at several buildings last quarter were filled. In Sendai, the vacancy rate fell due to several cases of tenants expanding within their existing building. In Yokohama, companies set up satellite or new offices, while a manufacturer decided to relocate its head office to a new building scheduled for completion in 2021. In Kanazawa, a new building – the first in five years – was completed at full occupancy. In Kyoto, several shared office companies signed new leases. In Hiroshima, while a new building in the central area was completed at full occupancy, the vacancy rate fell below 2% for the first time since surveys started recording this figure in 2001. In Fukuoka, the vacancy rate rose slightly (+0.1%) due to high asking rents at some properties being shunned by prospective tenants, but supply-demand conditions remain tight.

Assumed achievable rents rose in all 10 cities for the eighth consecutive quarter. Among these, Kyoto saw a 3.4% q-o-q rise in rents, the highest among the 10 cities and also a record high. Looking at the annual rate of increase for full-year 2019, Kyoto registered the strongest gain, at +11.7%, followed by Fukuoka at +9.3%.

■ NATIONWIDE VACANCY RATES AND ASSUMED ACHIEVABLE RENT

^{Source: CBRE, Q4 2019}

■ TOKYO

^{Source: CBRE, Q4 2019}

■ OSAKA

^{Source: CBRE, Q4 2019}

■ NAGOYA

^{Source: CBRE, Q4 2019}

For further details of the market data in each city and an overview of market conditions, refer to Japan Office MarketView Q4 2019.
https://www.cbre.co.jp/en/research-reports/office-reports

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