Decline halts for Tokyo Grade A rents but upcoming new supply likely to trigger further adjustments
Forecast*
Tokyo: All-Grade vacancy rate rises after two consecutive quarters of decline
‒ The All-Grade vacancy rate for Q2 2023 rose by 0 3 pp q-o-q to 4 9%, primarily due to new supply coming on stream with significant vacancies Although vacant space in new supply was equivalent to 0.7% of total stock, the continuing absorption of space in existing buildings ensured the overall increase in vacancy rate was limited to 0.3 pp All-Grade rents fell by 0.2% q-o-q on the back of the continued lowering of asking rents in buildings with prolonged vacancies.
Osaka: Tenant demand remains robust
‒ The All-Grade vacancy rate rose by 0.1 pp q-o-q to reach 3.7% this quarter due to additional vacancies in existing premises as a result of relocations to buildings completed last year Demand remained generally strong, however, with vacancies continuing to be filled by relocations from suburban areas, consolidations, and expansions All-Grade rents were unchanged from the previous quarter, with interest in larger units remaining limited.
Nagoya: All-Grade vacancy rate drops for the third straight quarter
‒ The All-Grade vacancy rate slipped by 0.3 pp q-o-q to 5.2% in Q2 2023 marking the third straight quarter in which it has fallen. Compared to last year, interest is seen not only for small- to medium-sized but also for larger units. With vacancies absorbed in all range of floor space this quarter, the vacancy rate fell across all grades. All-Grade rents rose by 0 4% q-o-q, the first quarterly increase since Q1 2021. During the quarter, several landlords were seen adjusting previously lowered asking rents back up to their original levels.
Regional cities: Absorption of space in existing buildings pushes down vacancy in many cities
‒ All-Grade vacancy rates fell q-o-q in seven of the 10 cities surveyed, rising in the other three The number of cities with declining vacancy rates increased from five in Q1 2023 on the back of the continued absorption of vacancies in existing buildings All-Grade rents for the quarter rose q-o-q in seven of the 10 cities surveyed, falling in the remaining three. Cities in which average rents increased saw hikes in asking rates in buildings now seen as offering value for money and in new buildings where leasing is progressing smoothly.
Tokyo
All-Grade vacancy rate rises after two consecutive quarters of decline
The All-Grade vacancy rate rose by 0.3 pp q-o-q to 4.9% in Q2 2023 following two consecutive quarters of decline. This quarter’s new supply largely consisted of one Grade A building, which came on stream with vacancies. However, as was the case in the previous quarter, existing vacancies were absorbed by companies moving to new premises in superior locations or higher-grade buildings. As a result, even though vacancies in new supply reached 50,000 tsubo, equivalent to 0.7% of total stock, the increase in the vacancy rate on a q-o-q basis was confined to just 0 3 pp While the Grade A vacancy rate spiked by 1 8 pp q-o-q to 5 7%, the vacancy rate for the Grade A-minus category, which saw no new supply this quarter, fell by 0 2 pp to 5 0% Grade B, in which very little new supply came on stream, also saw a decline in the vacancy rate, which fell 0 2 pp q-o-q to 4 4% With demand for corporate relocations to superior sites and grades remaining robust, tenant enquiries have increased from last year, especially among Japanese companies Marunouchi/Otemachi saw the greatest number of such vacancies filled during the quarter, which drove a 1 0 pp q-o-q fall in the vacancy rate, leaving it at 1 6% at quarter’s end With another 100,000 tsubo of new office space, including some in the Grade A segment, slated for completion in H2 2023 CBRE expects many new buildings to come on stream with significant vacancies With new supply likely to trigger more vacancies in existing buildings, the vacancy rate across the entire marketplace is forecasted to continue to rise.
Grade A rents remained unchanged from the previous quarter at JPY 34,550 per tsubo per month, halting a prolonged slide that commenced in Q2 2020. While some landlords continue to reduce asking rents to secure tenants, buildings with fewer vacancies have actually seen rents increase However, significant future supply and the consequent loosening of the supply-demand balance should ensure rents begin to fall once more. CBRE forecasts Grade A rents to drop by 1 4% over the next 12 months.
Osaka
Tenant demand remains robust
The Grade A vacancy rate fell by 0 7 pp q-o-q to 3 5% in Q2 2023 due to the steady absorption of major vacancies following the relocation of a company’s headquarters from a self-owned property In contrast, the Grade B vacancy rate rose by 0 4 pp q-o-q, reaching 3 9% on the back of several large vacancies in existing premises emerging as a result of relocations to buildings completed last year Demand remained generally strong, however, with vacancies continuing to be filled by relocations from suburban areas,
consolidations, and expansions The All-Grade vacancy rate therefore remained largely unchanged, rising by just 0.1 pp q-o-q to 3.7%. With no further new supply planned for the rest of the year, existing vacancies should continue to be steadily absorbed in the coming quarters As a result, CBRE projects the vacancy rate for the market as a whole to decline throughout H2 2023 However, 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 4% q-o-q to JPY 24,000 per tsubo per month for Grade A office buildings, and remained unchanged at JPY 14,700 per tsubo per month for Grade B properties All-Grade rents also remained unchanged from the previous quarter at JPY 14,120 per tsubo per month While some tenant activity was observed this quarter, interest in larger units remained weak. With significant new supply slated for 2024, landlords are likely to continue to lower rents to secure tenants. CBRE is projecting rental declines of 1.3% in the Grade A segment and 1.0% in the Grade B segment over the next 12 months
Nagoya
All-Grade vacancy rate drops for third straight quarter
The All-Grade vacancy rate slipped by 0 3 pp q-o-q to 5 2% in Q2 2023, marking the third straight quarter in which it has fallen With no new supply coming on stream over the quarter, absorption of existing vacancies outstripped new vacancies. The period saw vacancies filled by companies, particularly from the IT and human resources sectors, looking to upgrade, expand, or move to superior locations. Compared to last year, interest is stronger not only for small- to medium-sized units but also for larger units of over 300 tsubo. With vacancies absorbed for all range of floor-space bands, the vacancy rate fell across all grades over the course of Q2 2023. The coming quarter will see one large building and a total of 17 000 tsubo of new floor space come on stream. This represents 130% of average annual new supply since records began in 1993, to be completed in just a single quarter. As this new supply is also likely to trigger vacancies in existing buildings, the vacancy rate across the entire marketplace is expected to rise
Average rents for the quarter fell by 0 2% q-o-q for Grade A office buildings, rose by 0.3% for Grade B, and rose by 0.4% for All-Grade. This marked the first occasion that All-Grade rents had risen since Q1 2021. During the quarter, several landlords, particularly of smaller buildings, adjusted previously lowered asking rents back up to their original levels, pushing up the average across the market. However, this rise in rent levels is expected to be temporary, with significant future supply and the consequent loosening of the supply-demand balance set to ensure that rents continue to fall albeit moderately CBRE projects rental declines of 1 7% in the Grade A segment and 0 7% in the Grade B segments over the next 12 months
Regional cities
(Sapporo/Sendai/Saitama/Yokohama/Kanazawa/Kyoto/Kobe/Takamatsu/Hiroshima/Fukuoka)Absorption pushes down vacancy rates in more cities
All-Grade vacancy rates fell q-o-q in seven of the 10 cities surveyed in Q2 2023, rising in the other three. The number of cities where vacancy rates declined rose from five last quarter due to the continued absorption of vacancies in existing buildings. The steepest decline in vacancy was recorded in Kyoto, which logged a fall of 1.2 pp q-o-q, after significant vacancies in a building completed last year were filled by a company relocating to consolidate its office spaces. Kobe followed with a decline of 0 9 pp, which was due to multiple tenants being confirmed for recently completed buildings that had previously struggled to find tenants. All absorption resulted from relocations by companies opening new premises, looking to upgrade, or moving to superior locations Nationwide, a number of cases were observed in which companies expanded their floor space within their current buildings. This trend was driven primarily by a desire to reduce relocating expenses amidst an environment of rising costs In contrast, Yokohama saw several large-scale vacancies in the Minato-Mirai area, as interest remained weak for larger spaces exceeding 100 tsubo In Fukuoka, the quarter saw the completion of three new buildings, one of which commenced operations at almost full occupancy, with the remaining two reporting significant vacancies As vacancies in a building completed last quarter continued to be absorbed, the increase in the vacancy rate was limited to just 0 2 pp
Majority of the cities record rent increases
All-Grade rents for Q2 2023 rose q-o-q in seven of the 10 cities surveyed, falling in the remaining three Since the onset of the COVID-19 pandemic, the only previous quarters in which a majority of regional cities saw rent increases were Q2 2020 and Q4 2021 Sapporo continued to experience a tight supply-demand balance, which resulted in rents rising for the seventh straight quarter, this time by 0.3% q-o-q. Sendai also posted a third straight quarter of rising rents, up 0.1% q-o-q. With several more relocations triggered by the implementation of redevelopment plans, rents were raised in cheaper buildings. In Fukuoka, rents rose by 0 1% q-o-q, the first rise in seven quarters albeit a moderate one. Asking rates were raised in buildings capable of offering large single-floor space, which were now seen as offering value for money, and in new buildings whose leasing is proceeding smoothly. In contrast, cities with large scale vacancies, such as Yokohama and Kanazawa, reported further declines in rents over the 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
Building Grade Definition
All-Grade
tsubo or more 7,000 tsubo or more 2,000 tsubo or more 2,000 tsubo or more 1,000 tsubo or more
Typical floor plate: 500** tsubo Greater than 250 tsubo Greater than 200 tsubo (except Grade A) (except Grade A & GradeA-Minus) (except Grade A)
Age Generally less than 15 years
Other Landmark status, specifications, etc.
Terms and Definitions
Space Measurement 1 tsubo=3.3058 square meters=35.58 square feet
Surveyed Buildings
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
Tokyo
Meiji Yasuda Seimei Building 2-1-1 Marunouchi, Chiyoda-ku
Tokyo
Osaka
Grand Front Osaka 4-20, Ofuka-cho Kita-ku Osaka-shi, Osaka
Sapporo
Nihon Seimei Sapporo Building 4-1-1 Kitasanjonishi, Chuo-ku
Sapporo-shi Hokkaido
Sendai
Kanazawa
Aube II Building 5-177 Kuratsuki, Kanazawa-shi, Ishikawa
Nagoya
Miyuki Building 3-20-27 Nishiki
Naka-ku Nagoya-shi
Aichi
Hiroshima
Shishinyo Building 3-17
Fukuromachi Naka-ku
Hiroshima-shi Hiroshima
Fukuoka
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 Assumed achievable rent of floorplate (including common area maintenance fee)
New Supply Net lettable area of buildings completed during each period
Net Absorption Difference between occupied floor space (floor space used by tenants) in a given period and that of the previous period
Number of Grade A Buildings Tokyo: 98 Osaka: 29 Nagoya: 11 (as of Q2 2023)
Contacts
Hiroshi
Yuji
Yoshitaka
Kumiko
Sendai Mark One 1-2-3 Chuo, Aoba-ku Sendai-shi, Miyagi
Yokohama
Yokohama ST Building 1-11-15
Kitasaiwai, Nishi-ku Yokohama-shi, Kanagawa
Fukuoka Center Building 2-2-1
Hakata-Ekimae
Hakata-ku, Fukuoka-shi, Fukuoka
To learn more about CBRE Research, or to access additional research reports, please visit the Insights & Research at Insights&Research
© 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
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
