Japan Office MarketView Q3 2023

MARKETVIEW | JAPAN OFFICE | Q3 2023

MARKETVIEW | JAPAN OFFICE | Q3 2023

New supply pushes up vacancy while existing vacancies continue to be filled ＋2.2% Forecast* Y-o-Y GDP Growth Q3

10pts 2pts Q-o-Q ＋

BOJ Tankan DI (All Enterprises) Q3

±0.0% Q-o-Q Tokyo Grade A Rent Q3

＋0.9pts Q-o-Q

Tokyo Grade A Vacancy Rate Q3

*JCER Forecast

Tokyo: Rents remain unchanged across all three grades

Figure 1: Grade A Average Assumed Achievable Rent

‒ The All-Grade vacancy rate for Q3 2023 rose to 5.2%, up 0.3 pp. from the previous quarter. The increase in vacancy observed this quarter was primarily due to new supply coming on stream with some space still available for lease. With the relatively cheap rents asked by landlords of units in existing buildings proving attractive to potential tenants, vacancies in such properties continued to be filled. As a result, there are now a disproportionate number of vacancies in newly completed buildings. Rents remained unchanged across all three grades, but All-Grade rents dropped by 0.1% q-o-q, pushed down because of downward rent adjustments mainly in small- to mid-sized buildings.

40,000 JPY/tsubo

▶ Forecast

35,000

Osaka: Grade A vacancy rate drops for fourth straight quarter

Nagoya: First new supply since 2018 pushes up Grade A vacancy for first time in four quarters ‒ The All-Grade vacancy rate rose by 0.6 pp. q-o-q to 5.8%, the first increase in four quarters. This was largely a result of vacancies within new supply completed during the quarter. However, the one Grade A office building completed in Q3 2023 commenced operations with a comparatively high occupancy rate. Vacancies also continued to be filled in existing buildings, particularly those seen by tenants as offering value for money. All-Grade rents stayed unchanged from the previous quarter; with fewer vacancies, fewer landlords were compelled to cut rents.

Regional cities: Tenant enquiries remain stable as vacancies absorbed in existing buildings ‒ During Q3 2023, the All-Grade vacancy rate rose q-o-q in four of the 10 surveyed cities, remained unchanged in four, and fell in the remaining two. Of the cities reporting higher vacancy, new supply was the primary cause of the increases observed in Sapporo and Yokohama. Tenant enquiries remained stable nationwide. All-Grade rents for the quarter rose q-o-q in six of the 10 cities surveyed, remained unchanged in two, and fell in the remaining two. As was the case in the previous quarter, a majority of regional cities saw rent increases.

30,000

25,000

20,000

15,000

Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024

‒ The All-Grade vacancy fell by 0.4 pp. to 3.3% this quarter on the back of continued robust demand. The Grade A vacancy rate dropped by 0.5 pp. q-o-q to 3.0%, marking the fourth straight quarter of decline. Companies relocating to superior sites or carrying out in-house expansions absorbed a number of large vacancies during the period. Meanwhile, All-Grade rents fell by 0.1% from the previous quarter as landlords continued to lower rents to secure tenants.

Tokyo

Osaka

Nagoya

Source: CBRE, Q3 2023

1

CBRE RESEARCH

© 2023 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q3 2023

Tokyo Rents remain unchanged across all three grades The All-Grade vacancy rate rose by 0.3 pp. q-o-q to 5.2% in Q3 2023, while the Grade A vacancy rate rose 0.9 pp. to reach 6.6%. The rise in vacancy this quarter were largely due to the completion of new buildings – including two Grade A properties – which came on stream with some vacancies. In contrast, the relatively cheap rents in existing buildings continued to ensure vacancies in such properties were taken up, mainly by tenants looking to upgrade their premises or relocating due to rebuilding. The vacancy rate for existing office buildings – defined as at least one-year-old - fell to 4.0% this quarter, 1.2 pp. below the overall vacancy rate of 5.2%. A year ago, in Q3 2022, the vacancy rate for existing facilities was 4.3%, just 0.6 pp. below the overall figure of 4.9%. Since then, this gap has been steadily expanding, underscoring the fact that vacancies are more likely to be found in newly completed buildings.

Average rents for the quarter fell by 0.2% q-o-q to JPY 23,950 for Grade A office buildings and remained unchanged at JPY 14,700 for Grade B properties. All-Grade rents slipped by 0.1% from the previous quarter to JPY 14,110 per tsubo. While the rental reductions observed this quarter were not as dramatic as the cuts implemented in previous quarters, Grade A rents continue to be lowered to attract tenants. CBRE forecasts Grade A rents to drop by a further 1.5% over the next 12 months.

Grade A rents remained unchanged for the second consecutive quarter. Grade A-minus and Grade B rents were also static, temporarily bringing an end to declines that had been observed since Q2 2020. While the vacancy rate across the entire market rose this quarter, there are fewer number of existing office buildings with vacancies. This has led to fewer number of landlords lowering their asking rents, with some owners of buildings with fewer vacancies now considering raising rents to their former levels. In smaller buildings, however, rental decreases to secure tenants continue to outpace any rental increases. As a result, AllGrade rents registered a marginal decrease of 0.1% from the previous quarter. Downward pressure on rents is projected to continue in the coming quarters as several large new buildings are scheduled to commence operations less than fully leased. This would mean that rents remain unchanged or weaken slightly over the short term. CBRE forecasts Grade A rents to drop by 0.4% over the next 12 months.

First new supply since 2018 pushes up Grade A vacancy rate for first time in four quarters

Osaka Grade A vacancy rate drops for fourth straight quarter The Grade A vacancy rate dropped 0.5 pp. q-o-q to 3.0% in Q3 2023, marking the fourth straight quarterly decline. Lower vacancy was a consequence of the absorption of several large vacancies in relatively new buildings by companies relocating to superior or more central sites or expanding in their current premises.

The relatively cheap rents offered by existing Grade A buildings in comparison to those slated for completion next year are also a contributing factor to the absorption of current vacancies. In the Grade B segment, secondary vacancies continued to emerge as a result of relocations to buildings completed last year. However, several vacancies were filled by companies looking to upgrade their building grades or locations, expand, or relocate for rebuilding, and the Grade B vacancy rate fell by 0.5 pp. to 3.4%. As in the previous quarter, leasing demand remained robust, with vacancies steadily filled over the course of Q3

2

2023, particularly in existing buildings. Consequently, the All-Grade vacancy rate fell by 0.4 pp. q-o-q to 3.3%. However, with 2024 set to see the completion of approximately 90,000 tsubo of new office space across all grades, equivalent to 5% of existing office space in Osaka, CBRE projects the vacancy rate to begin to rise again from next year.

CBRE RESEARCH

Nagoya

The All-Grade vacancy rate rose by 0.6 pp. q-o-q to 5.8% in Q3 2023, while the Grade A vacancy rate rose by 0.8 pp. over the same period, reaching 8.5%. These movements represented the first increases in vacancy for four quarters and were largely due to the addition of 17,000 tsubo of new supply, including one Grade A building, which came on stream with some units still vacant. Nonetheless, leasing demand remains robust. The new Grade A building completed this quarter was the first such property to commence operations in Nagoya for five years, and located in the Sakae area, where there is relatively high concentration of older buildings. As a result, the new property has proved attractive to a number of tenants of nearby buildings who have been seeking to upgrade their offices, and opened with a comparatively high occupancy rate. Vacancies continued to be filled in existing buildings during the quarter, particularly those seen as offering superior value for money, amid strong demand from tenants looking to improve office locations or expand floor space. As a result, net absorption for the quarter reached 11,000 tsubo, well above the past quarterly average of 3,000. However, new supply is projected to continue to push vacancy rates upward in the coming quarters. With 14,000 tsubo of new supply due for completion in Q1 2024, secondary vacancies are likely to appear in existing buildings.

All-Grade rents remained unchanged this quarter, while Grade A rents rose by 0.2% q-o-q, the first quarterly increase since Q1 2020. Owners of buildings where vacancies have decreased or which are attracting more demand were seen to stop lowering their asking rents, with some even looking to raise rents to their former levels. However, the expected loosening of the supply-demand balance in the coming quarters should lead rents to fall once more. CBRE forecasts Grade A rents to decline by 2.3% over the next 12 months.

© 2023 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q3 2023

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

Figure 2: Vacancy Rate in 13 Cities

0%

10%

20%

Tenant demand remain stable nationwide and vacancies are taken up in existing buildings

(%)

＋0.9

Tokyo Grade A

－0.1

Tokyo Grade B

－0.5

－0.5

－0.4

＋0.8 ＋1.0

＋0.6 ＋0.6

±0.0 ＋1.2

－0.1

＋1.0

All-Grade rents in Q3 2023 rose from the previous quarter in six of the 10 surveyed cities, remained unchanged in two, and fell in two. As was the case in the previous quarter, majority of the regional cities registered rental increases this quarter. However, these hikes were uniformly small, with cities that are set to receive significant new supply in the coming quarters likely to see rents fall again soon.

±0.0

－0.6

±0.0

＋0.2

±0.0

Q4 2009-Q3 2023 Q3 2023 Source: CBRE, Q3 2023

CBRE RESEARCH

(pts)

＋0.3

Majority of the cities record rental increases for second straight quarter

3

Q-o-Q 0

30% Q-o-Q

15,000

30,000

JPY/tsubo

45,000

±0.0

＋0.1 Tokyo Grade A-Minus ±0.0

During Q3 2023, the All-Grade vacancy rate rose q-o-q in four of the 10 surveyed cities, remained unchanged in four, and fell in the remaining two. Of the cities reporting higher vacancy, new supply was the primary cause of the increases observed in Sapporo and Yokohama. The one new building completed in Sapporo this quarter commenced operations with vacancies, leading to a rise of 1.2 pp. in the vacancy rate. The vacancy rate nevertheless remains at a relatively low 2.0%, underscoring the tightness of the city’s supply-demand balance. In Kanazawa, the vacancy rate rose by 1.0 pp. this quarter, largely due to secondary vacancies arising from the relocation of tenants to a new building completed last year. Demand remains robust nationwide, however, with leasing activity observed even in cities where the vacancy rate rose or remained unchanged. In addition to several new office openings and relocations to larger premises, CBRE observed an increase in demand for larger units of over 100 tsubo. In Saitama and Kobe, in particular, the supply-demand balance remains exceedingly tight, with these cities reporting vacancy rates of between 1 and 2%. With only limited new supply slated for 2024, tenants will continue to find it challenging to secure larger units. In Fukuoka, where the vacancy rate has risen significantly since the beginning of the year, several vacancies were filled in buildings completed in H1 2023. In terms of existing buildings, while there were companies which have opted to either leave Fukuoka or reduce their office space in the city, other tenants have chosen to expand their floor space, ensuring the vacancy rate remained unchanged from the previous quarter.

In Saitama, CBRE noted several cases of rents that had been lowered during the pandemic being adjusted back to their original levels, particularly in larger buildings. Rents in the city rose for the third straight quarter, increasing by 0.4% q-o-q. Sapporo recorded a 0.3% q-o-q rise in rents, marking an eighth consecutive quarterly increase. Of the two cities recording rental declines, Yokohama saw owners of several buildings with vacancies in the Minato-mirai area reduce rates aiming to secure tenants.

Figure 3: Average Assumed Achievable Rent in 13 Cities

Tokyo All-Grade Osaka Grade A Osaka Grade B Osaka All-Grade Nagoya Grade A Nagoya Grade B Nagoya All-Grade Yokohama Saitama Sapporo Sendai Kanazawa Kyoto Kobe Hiroshima Takamatsu Fukuoka

±0.0

－0.1

－0.2

±0.0

－0.1

＋0.2

±0.0

±0.0

－0.5

＋0.4

＋0.3

＋0.1

－0.1

±0.0 ＋0.5

＋0.2 ＋0.1

±0.0 Q4 2009-Q3 2023 Q3 2023 Source: CBRE, Q3 2023

© 2023 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q3 2023

Figure 4: Market Summary

Vacancy Rate (%) Q-o-Q Q3 2022 Q2 2023 Q3 2023 (pts)

Tokyo Grade A

Q-o-Q (%)

Y-o-Y (%)

34,750 34,550 34,550 ±0.0

－0.6

All

3.8

5.7

6.6

＋0.9

＋2.8

Marunouchi/ Otemachi

2.3

1.1

1.9

＋0.8

－0.4 44,000 44,000 43,950

－0.1

Grade A-Minus All

5.8

5.0

5.1

＋0.1

－0.7 24,000 23,600 23,600

Grade B

4.9

4.4

4.3

－0.1

－0.6

All-Grade

4

Assumed Achievable Rent (JPY/tsubo) Y-o-Y (pts) Q3 2022 Q2 2023 Q3 2023

All

Vacancy Rate (%) Q-o-Q Q3 2022 Q2 2023 Q3 2023 (pts)

Nagoya

Assumed Achievable Rent (JPY/tsubo) Y-o-Y (pts) Q3 2022 Q2 2023 Q3 2023

Q-o-Q (%)

Y-o-Y (%)

Grade A

All

8.5

7.7

8.5

＋0.8

±0.0

26,800 26,400 26,450

＋0.2

－1.3

－0.1

Grade B

All

5. 1

4.3

5.3

＋1.0

＋0.2

14,300 14,350 14,350 ±0.0

＋0.3

±0.0

－1.7

All-Grade

All

5.8

5.2

5.8

＋0.6

±0.0

13,780 13,790 13,790 ±0.0

＋0.1

21,650 21,450 21,450 ±0.0

－0.9

Meieki

6.3

5.1

6.9

＋1.8

＋0.6

18,300 18,290 18,270 －0.1

－0.2

7.4

7.6

7.1

－0.5

－0.3

12,720 12,700

12,710 ＋0.1

－0.1

13,160 ±0.0

＋0.1

All

4.9

4.9

5.2

＋0.3

＋0.3

21,490 21,300 21,270

－0.1

－1.0

Fushimi/ Marunouchi

Central 5 Wards

4.6

4.4

4.6

＋0.2

±0.0

22,730 22,500 22,480

－0.1

－1.1

Sakae

3.4

3.0

3.9

＋0.9

＋0.5

13,150

Marunouchi/ Otemachi

3.4

1.6

1.9

＋0.3

－1.5

38,540 38,170 38,150

－0.1

－1.0

Nagoya-Higashi

2.5

0.7

0.4

－0.3

－2.1

9,970 10,120 10,140

＋0.2

＋1.7

Kanda/ Iidabashi

3.9

3.0

3.1

＋0.1

－0.8

20,330 20,310 20,350

＋0.2

＋0.1

All

3.0

6.3

6.9

＋0.6

＋3.9

16,340 16,230

－0.5

－1.2

1.8

2.4

2.3

－0.1

＋0.5

15,370 15,370 15,370 ±0.0

±0.0

3.7

8.4

9.4

＋1.0

＋5.7

19,450 19,010 18,690

－1.7

－3.9

Yokohama All-Grade

13,160

16,150

Yaesu/ Nihonbashi

6.3

4.5

4.5

±0.0

－1.8

22,640 22,380 22,320 －0.3

－1.4

Around Yokohama Station

Roppongi/ Akasaka

4.4

11.4

11.1

－0.3

＋6.7

25,490

25,110 25,070

－0.2

－1.6

Minato-mirai

Toranomon/ Shiodome

5.4

3.7

5.1

＋1.4

－0.3

25,840 24,920 24,680

－1.0

－4.5

Saitama

All-Grade

2.2

1.3

1.3

±0.0

－0.9

19,460 19,390 19,460 ＋0.4

±0.0

Shinjuku

4.6

3.5

3.4

－0.1

－1.2

22,250 22,230 22,300 ＋0.3

＋0.2

Sapporo

All-Grade

1.0

0.8

2.0

＋1.2

＋1.0

15,510 15,650 15,700

＋0.3

＋1.2

Shibuya/ Ebisu

2.1

3.0

2.2

－0.8

＋0.1

24,760 24,660 24,610

－0.2

－0.6

Sendai

All-Grade

2.5

3.0

2.9

－0.1

＋0.4

11,470 11,500

11,510 ＋0.1

＋0.3

Shinagawa/ Tamachi

5.4

5.6

6.2

＋0.6

＋0.8

21,010 20,610 20,560

－0.2

－2.1

Kanazawa

All-Grade

14.5

13.9

14.9

＋1.0

＋0.4

10,880 10,770 10,760 －0.1

－1.1

Osaki

4.5

3.5

3.1

－0.4

－1.4

18,380 18,520 18,560

＋0.2

＋1.0

Kyoto

All-Grade

4.5

4.3

4.3

±0.0

－0.2

15,480 15,410 15,410 ±0.0

－0.5

Osaka Grade A

All

4.8

3.5

3.0 －0.5

－1.8

24,450 24,000 23,950

－0.2

－2.0

Kobe

All-Grade

3.7

2.2

1.6

－0.6

－2.1

12,020 12,030 12,090

＋0.5

＋0.6

Grade B

All

3.2

3.9

3.4 －0.5 ＋0.2

14,800 14,700 14,700 ±0.0

－0.7

Hiroshima All-Grade

6.2

5.6

5.6

±0.0

－0.6

11,800

11,810

11,830

＋0.2

＋0.3

All-Grade

All

3.5

3.7

3.3 －0.4

－0.2

14,180 14,120

14,110

－0.1

－0.5

Takamatsu All-Grade

8.3

6.5

6.7

＋0.2

－1.6

9,480

9,730

9,740 ＋0.1

＋2.7

Umeda

5.6

5.1

4.8

－0.3

－0.8

22,170 21,890 21,870

－0.1

－1.4

Fukuoka

3.2

4.8

4.8

±0.0

＋1.6

16,080 16,050 16,050 ±0.0

－0.2

Dojima

2.7

5.7

1.0

－4.7

－1.7

17,800 17,670 17,550

－0.7

－1.4

Nakanoshima

1.8

2.6

2.3

－0.3

＋0.5

20,380 19,890 19,910

＋0.1

－2.3

Yodoyabashi

3.9

2.3

1.9 －0.4

－2.0

17,100 17,070 17,040

－0.2

－0.4

Honmachi

3.2

4.9

4.8

－0.1

＋1.6

14,290 14,220 14,220 ±0.0

－0.5

Shin-Osaka

9.0

7.4

6.6 －0.8

－2.4

14,680 14,520 14,540

－1.0

CBRE RESEARCH

＋0.1

All-Grade

Source: CBRE, Q3 2023

© 2023 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q3 2023

Building Grade Definition All-Grade Grade A Tokyo: Central 5 Wards* Osaka, Nagoya: Office area

Office area in Tokyo 23 Wards

NLA:

6,500 tsubo or more

4,500 tsubo or more

GFA:

10,000 tsubo or more 500** tsubo

Location

Size

Grade A-Minus

Typical floor plate:

Grade B Office area in Tokyo 23 Wards

Office area in Osaka & Nagoya

Office area in 13 cities nationwide set by CBRE

7,000 tsubo or more

2,000 tsubo or more

2,000 tsubo or more

1,000 tsubo or more

Greater than 250 tsubo

Greater than 200 tsubo

ー

(except Grade A & GradeA-Minus)

(except Grade A)

Age

Generally less than 15 years

Other

Landmark status, specifications, etc.

ー

ー

ー

ー

(except Grade A)

Buildings satisfying the 1981 anti-seismic standards *Central 5 Wards: Chiyoda Ward, Chuo Ward, Minato Ward, Shinjuku Ward, Shibuya Ward **350 tsubo for Osaka and Nagoya

Terms and Definitions Space Measurement

1 tsubo=3.3058 square meters=35.58 square feet

Surveyed Buildings

Office buildings for lease located in office markets in 13 major cities nationwide, with gross floor area of 1,000 tsubo or more, and compliant with the new earthquake resistance standards.

Surveyed Period

Quarterly Vacancy rate: (1) End of March (2) End of June (3) End of September (4) End of December Quarterly Assumed achievable rents: (1) End of March (2) End of June (3) End of September (4) End of December

Vacancy Rate

Vacancies are those that are ready to receive tenants at time of survey

Assumed Achievable Rent New Supply Net Absorption Number of Grade A Buildings

Tokyo

Kanazawa

Meiji Yasuda Seimei Building 2-1-1 Marunouchi, Chiyoda-ku, Tokyo

Aube II Building 5-177 Kuratsuki, Kanazawa-shi, Ishikawa

Osaka

Nagoya

Grand Front Osaka 4-20, Ofuka-cho, Kita-ku, Osaka-shi, Osaka

Miyuki Building 3-20-27 Nishiki, Naka-ku, Nagoya-shi, Aichi

Sapporo

Hiroshima

Nihon Seimei Sapporo Building 4-1-1 Kitasanjonishi, Chuo-ku, Sapporo-shi, Hokkaido

Shishinyo Building 3-17 Fukuromachi, Naka-ku, Hiroshima-shi, Hiroshima

Sendai

Fukuoka

Sendai Mark One 1-2-3 Chuo, Aoba-ku, Sendai-shi, Miyagi

Fukuoka Center Building 2-2-1 Hakata-Ekimae, Hakata-ku, Fukuoka-shi, Fukuoka

Yokohama Yokohama ST Building 1-11-15 Kitasaiwai, Nishi-ku, Yokohama-shi, Kanagawa

Assumed achievable rent of floorplate (including common area maintenance fee) Net lettable area of buildings completed during each period Difference between occupied floor space (floor space used by tenants) in a given period and that of the previous period Tokyo: 100 Osaka: 29 Nagoya: 12 (as of Q3 2023)

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Contacts

Hiroshi Okubo

Yuji Iwama

Yoshitaka Igarashi

Kumiko Ninomiya

Head of Research

Director

Director

Analyst

hiroshi.okubo@cbre.com

yuji.iwama@cbre.com

yoshitaka.igarashi@cbre.com

kumiko.ninomiya@cbre.com

© Copyright 2023. All rights reserved. This report has been prepared in good faith, based on CBRE’s current anecdotal and evidence based views of the commercial real estate market. Although CBRE believes its views reflect market conditions on the date of this presentation, they are subject to significant uncertainties and contingencies, many of which are beyond CBRE’s control. In addition, many of CBRE’s views are opinion and/or projections based on CBRE’s subjective analyses of current market circumstances. Other firms may have different opinions, projections and analyses, and actual market conditions in the future may cause CBRE’s current views to later be incorrect. CBRE has no obligation to update its views herein if its opinions, projections, analyses or market circumstances later change.

5

Nothing in this report should be construed as an indicator of the future performance of CBRE’s securities or of the performance of any other company’s securities. You should not purchase or sell securities—of CBRE or any other company—based on the views herein. CBRE disclaims all liability for securities purchased or sold based on information herein, and by viewing this report, you waive all claims against CBRE as well as against CBRE’s affiliates, officers, directors, employees, agents, advisers and representatives arising out of the accuracy, completeness, adequacy or your use of the information herein.

CBRE RESEARCH

© 2023 CBRE, INC.