Take-ups increase with more tenant enquiries nationwide

GDP Growth Q1 5pts BOJ Tankan DI (All Enterprises) Q1

Tokyo Grade A Rent Q1

Tokyo Grade A Vacancy Rate Q1

Tokyo: All-Grade vacancy rate drops for second straight quarter

‒ The All-Grade vacancy rate fell for the second straight quarter in Q1 2023, down 0 1 pp q-o-q to 4 6% While most newly completed buildings commenced operations with some vacancies remaining, vacant spaces in existing properties continued to be filled by tenants looking to upgrade or move to better locations. Net absorption reached 78,000 tsubo, the highest single quarter total since Q2 2020 Nonetheless, All-Grade rents fell by 0.3% q-o-q, with asking rents being lowered in buildings with prolonged vacancies.

Osaka: Vacancy rate projected to remain steady until end of year

‒ The All-Grade vacancy rate rose by 0.1 pp. to 3.6% this quarter. Several of the new buildings completed in Q1 2023 came on stream with significant vacancies, but absorption of vacant spaces in existing buildings ensured overall vacancy did not rise substantially The absence of new supply meant Grade A vacancy fell for the second straight quarter All-Grade rents declined by 0 2% q-o-q, with rents being lowered in buildings with prolonged vacancies.

Nagoya: Vacancy rates fall across all grades

‒ The All-Grade vacancy rate slipped by 0.2 points q-o-q to 5.5% in Q1 2023, the second consecutive quarter decline. The absorption of vacancies in high-end spaces following lowering of asking rents was the primary factor behind this downward trend. As a result of relocations for the purposes of upgrading, expansion, or locational upgrades, vacancy rates fell across all grades. All-Grade rents fell by 0 2% q-o-q because of properties with relatively large vacancies lowering their asking rents.

Regional cities: Vacancy rates rise in cities with new supply

‒ All-Grade vacancy rates rose q-o-q in five of the 10 cities surveyed by CBRE, falling in the other five Other than Kobe, all cities which recorded rise in vacancy rate saw new buildings come on stream at less than full occupancy All-Grade rents fell q-o-q in four of the 10 surveyed cities, remained unchanged in two, and rose in the remaining four. With tenants remaining highly selective, landlords continue to offer rent-free periods or lower asking rents in order to secure new tenants.

Source: CBRE, Q1 2023

Tokyo

All-Grade vacancy rate drops for second straight quarter

The All-Grade vacancy rate fell for the second straight quarter in Q1 2023, down 0 1 pp q-o-q to 4.6%. As was the case in the previous quarter, the fall in vacancy was driven by companies moving to new premises in better locations or higher-grade buildings. New supply this year is slated to reach 240,000 tsubo, some 40% above the annual average over the past ten years. Of this, 69,000 tsubo came on stream in Q1 2023 most of which were left with some vacant space. While existing buildings also saw some new vacancies, net absorption reached 78 000 tsubo, the highest single quarter figure since Q2 2020 The Grade A-minus category saw the strongest absorption of existing vacancies, with vacancy dropping to its lowest level since Q3 2020 This is in line with the fact that Grade A-minus has registered the largest drop in rents over the past year, leading to more buildings now being seen as providing good value While tenants are still highly selective, they retain a robust appetite for new space to improve their office environment, with enquiries on the rise across the board, particularly from domestic companies At the same time, however, the decline in demand for office space among western multinational corporations, which began late last year and had previously been confined to the finance sector, has now spread to other industries including IT Some of these companies are looking to reconfigure their current office footprint or cancel current lease contracts. Pre-leasing of Grade A office buildings which are still under construction, previously driven by strong demand from western companies, has also slowed in recent months. With buildings expected to commence operations with vacancies, CBRE projects vacancy rate to rise again in the coming quarters.

Grade A rents fell by 0 4% q-o-q to JPY 34 550 per tsubo in Q1 2023 on the back of asking rents being lowered in buildings with prolonged vacancies. With major new supply slated for the rest of the year, landlords are likely to have to reduce rents to attract tenants CBRE forecasts Grade A rents to drop by 2.7% over the next 12 months.

Osaka

Vacancy rate projected to remain steady until end of year

The All-Grade vacancy rate was up 0 1 pp q-o-q to reach 3 6% in Q1 2023, largely because of significant vacancies in some of the newly completed buildings At the same time, however, the steady absorption of vacancies in existing buildings ensured that the increase in the vacancy rate was moderate With no new supply completed this quarter, vacancies in the existing Grade A category were taken up, leading to a second straight quarter of drop in vacancy, which slid by 0 1 pp q-o-q to 4 2% Corporate appetite for office upgrading remains strong, with units in buildings across all grades leased by companies looking to improve both the quality and location of their office. Several cases of companies relocating from ageing self-owned buildings were also observed this quarter, along with relocations for the purposes of expanding office space Units in buildings seen as offering good value for money for their location and those that are able to be subdivided were leased up relatively quickly over the quarter However, other buildings are being left vacant as a result of these relocations With no new supply planned for the rest of 2023, however, vacancies in existing buildings should continue to be filled, ensuring that overall vacancy remains largely unchanged That said, with approximately 100,000 tsubo of new office space across all grades slated for completion in 2024, the vacancy rate should begin to climb again from next year

Average rents for the quarter fell by 0 6% q-o-q to JPY 24,100 for Grade A buildings, and by 0 3% q-o-q to JPY 14,700 for Grade B buildings, with rents continuing to be lowered in buildings with prolonged vacancies. As this trend is set to continue for some time, CBRE projects rents to drop by a further 1.5% for Grade A and by 1.7% for Grade B over the next 12 months

Nagoya

Vacancy falls across all grades

The All-Grade vacancy rate fell for a second straight quarter in Q1 2023 down 0 2 pp q-o-q to 5 5% This was primarily a result of vacancies being filled in higher-end buildings, for which rents have been progressively lowered since the second half of last year, to the point where tenants now believe they offer good value for money. Just one medium-sized building was completed during the quarter, commencing operations at less than full occupancy While some new vacancies also appeared in existing buildings as a result of downsizing, net absorption was sufficiently high to ensure vacancy rates fell across all grades. During the quarter, a comparatively large number of tenants relocated in order to upgrade, expand, or move to better locations. There were also several cases involving companies moving to buildings with significant available space in order to accommodate potential future expansion. However, concerns over a global economic slow down has led an increasing number of corporations to adopt a more conservative stance with respect to their office strategies It is therefore possible that leasing activity may begin to slow in the coming months. With significant new supply due for completion in H2 2023, vacancies are likely to appear in existing buildings. These factors should combine to push vacancy rates up once again.

Rents fell by 0.2% q-o-q to JPY 26,450 for Grade A office buildings, but remained unchanged for the third straight quarter at JPY 14,300 for Grade B buildings. As the supply-demand balance weakens, rents are likely to continue to be adjusted downward for all grades CBRE projects rents to fall by 2 8% in the Grade A category and 1 0% in the Grade B segment over the next 12 months

Regional cities

(Sapporo/Sendai/Saitama/Yokohama/Kanazawa/Kyoto/Kobe/Takamatsu/Hiroshima/Fukuoka)

Vacancy rates rise in cities with new supply

All-Grade vacancy rose q-o-q in five of the 10 cities surveyed, and fell in the other five. Other than Kobe, all cities which recorded rise in vacancy rate saw new buildings come on stream at less than full occupancy. Increases of over 2.0 pp. q-o-q were observed in Yokohama and Fukuoka, as a result of both cities witnessing the completion of new supply equivalent to at least 4% of existing stock. While tenant activity remains robust nationwide for smaller units of less than 100 tsubo, interest in larger units is subdued. In Yokohama, the period saw a number of large-scale vacancies arise because of corporate downsizings. In contrast, vacancies in existing buildings in cities without any new supply continued to be filled. In a continuation of the trend from the previous quarter, a number of relocations were recorded in Sapporo for the purposes of floor space expansion or as a result of redevelopment plans. Demand was also observed from call centers and companies relocating from suburban areas As a result, Sapporo’s vacancy rate fell below 1% the lowest among all the cities under our coverage Significant leasing activity was registered in Saitama this quarter, both in terms of new developments and relocations to expand floor space or to move to superior sites Significant vacancies were absorbed in large office buildings, lowering the overall vacancy rate in the city by some 1 1 pp q-o-q

Tenants remain highly selective

All-Grade rents for Q1 2023 fell q-o-q in four of the 10 surveyed cities, remained unchanged in two, and rose in the remaining four In addition to cities such as Yokohama and Fukuoka, where new supply came on stream this quarter, rents also fell in Kanazawa, where significant vacancies continued to be observed in relatively new buildings Although tenant enquiries are up across the country, prospective tenants remain extremely selective with respect to building criteria. Owners are offering rent-free periods or lower asking rents in order to attract tenants. Meanwhile, Sapporo continues to experience a tight supply-demand balance, which ensured rents increased for the sixth straight quarter.

Tokyo Grade A

Tokyo Grade A-Minus

Tokyo Grade B

Tokyo All-Grade

Osaka Grade A

Osaka Grade B

Osaka All-Grade

Nagoya Grade A

Nagoya Grade B

Nagoya All-Grade