Japan Office MarketView Q4 2023

MARKETVIEW | JAPAN OFFICE | Q4 2023

MARKETVIEW | JAPAN OFFICE | Q4 2023

All-Grade rents rise in three major cities but new supply could weigh on future growth ＋1.8% Forecast* Y-o-Y GDP Growth Q4

13pts 3pts Q-o-Q ＋

BOJ Tankan DI (All Enterprises) Q4

＋0.3% Q-o-Q Tokyo Grade A Rent Q4

－0.9pts Q-o-Q

Tokyo Grade A Vacancy Rate Q4

*JCER Forecast

Tokyo: Rents rise across all grades for first time in three years

Figure 1: Grade A Average Assumed Achievable Rent

‒ The vacancy rate fell q-o-q in all grades in Q4 2023, with vacancies filled in new and recently completed buildings driving net absorption up to 83,000 tsubo, roughly double the recent quarterly average. Rents rose across all grades for the first time since Q1 2020. During the quarter, CBRE observed several cases in which previously lowered rents were raised again in buildings where vacancies were filled.

40,000 JPY/tsubo

Osaka: Vacancy falls in all grades

35,000

Nagoya: Grade A rents rise for second straight quarter ‒ The All-Grade vacancy rate for the quarter dropped by 0.2 pp. q-o-q to 5.6%, with vacancies filled in more competitive buildings with sought after facilities or in superior locations. Demand was driven by tenants looking to upgrade their offices; improve location; expand floor space; open new offices; or move to temporary premises for the purposes of rebuilding. All-Grade rents rose by 0.1% from the previous quarter, with the period witnessing several instances of rents that were previously lowered being raised once more in buildings either where vacancies were filled or strong tenant interest was seen.

Regional cities: Some cities report higher vacancy due to new supply but demand remains robust nationwide ‒ The All-Grade vacancy rate for the quarter rose q-o-q in six of the 10 surveyed cities; remained unchanged in one; and fell in the remaining three. While the vacancy rate rose on the back of new supply in some cities, robust nationwide demand was observed over the quarter, with many companies looking to upgrade or move to superior locations or open new premises. All-Grade rents for the quarter rose q-o-q in five of the 10 cities surveyed; remained unchanged in two; and fell in the remaining three, with the nationwide trend for declining rents showing signs of easing.

30,000

25,000

20,000

15,000

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 Q4 2024

‒ Vacancy declined q-o-q for all grades this quarter. The Grade A vacancy rate fell for a fifth straight quarter, down by 0.6-ppt q-o-q to 2.4%.

Thanks to robust tenant demand for both large and small units, vacancies were filled in a wide range of buildings, regardless of grade. AllGrade rents rose by 0.6% from the previous quarter, with rent hikes observed in some smaller well-located buildings, which are unlikely to face competition from the new supply slated to come on stream in 2024.

▶ Forecast

Tokyo

Osaka

Nagoya

Source: CBRE, Q4 2023

1

CBRE RESEARCH

© 2024 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q4 2023

Tokyo Rents rise across all grades for first time in three years The vacancy rate fell q-o-q across all grades in Q4 2023. The Grade A vacancy rate registered the sharpest fall, slipping by 0.9-ppt to 5.7%. Vacancies continued to be filled over the quarter, particularly in large newer buildings, as companies relocated to premises in superior locations and with desirable specifications for the purposes of strengthening staff attraction and retention. New supply for the quarter consisted of 47,000 tsubo, including two new Grade A office buildings. The Grade A building completed in the Shibuya/Ebisu area this quarter commenced operations at almost full occupancy. Keenly sought after for the convenience offered by its deck-style connection to Shibuya Station, the property secured leases from a local IT provider and several other large companies previously headquartered outside the area. In existing buildings, the period witnessed several instances in which tenants relocated to upgrade their offices; improve office location; or move to temporary premises for the purposes of rebuilding, resulting in the absorption of a number of long-term, large-scale vacancies. As a result, All-Grade net absorption for the quarter reached 83,000 tsubo, roughly double the previous quarterly average.

Average rents for the quarter fell by 0.2% q-o-q to JPY 23,900 for Grade A buildings, and by 0.3% q-o-q to JPY 14,650 for Grade B. With significant new supply due to come on stream in the Umeda area later this year, landlords of nearby buildings are lowering rents to secure tenants before competition increases.

Bucking the overall downward trend, All-Grade rents logged a 0.6% q-o-q increase, reaching JPY 14,190.

Rent hikes were observed in some smaller buildings below the Grade B category but in desirable locations, which are unlikely to face competition from this year’s new supply. However, the future loosening of the supply-demand balance should ensure that rents continue to fall moderately across all grades. CBRE forecasts Grade A rents to drop by a further 1.5% over the next 12 months.

On the back of surging demand, rents rose across all grades for the first time since Q1 2020. Average rents increased by 0.3% q-o-q to JPY 34,650 per tsubo per quarter for Grade A; by 0.4% q-o-q to JPY 23,700 for Grade A-Minus; and by 0.2% q-o-q to JPY 21,500 for Grade B office buildings. During the quarter, several cases were noted in which rents were raised back to previous levels in relatively competitive buildings in which vacancies were filled. At the same time, however, landlords of older buildings in less desirable areas continued to struggle with long-term vacancies, forcing them to lower rents still further. While demand and rents are showing signs of resurgence, significant disparity is now beginning to be seen between different properties. The popularity of newer buildings as a target for relocation activity is also likely to create major secondary vacancies in older buildings. With some 250,000 tsubo of new supply slated for 2025, downward pressure on rents may strengthen once more in the coming quarters. CBRE projects Grade A rents to continue to rise moderately until the middle of 2024 before falling thereafter, resulting in a net projection of no change between now and the end of 2024.

Grade A rents rise for second straight quarter

Osaka Vacancy rates fall in all grades The absorption of vacancies in existing buildings pulled down the vacancy rate across all grades this quarter. The Grade A vacancy rate fell for a fifth straight quarter, slipping by 0.6-ppt q-o-q to 2.4%. This resulted from the absorption of large vacancies in recently completed buildings by companies relocating to superior or larger premises, or expanding within the current premises. Several Grade B vacancies were also filled by companies expanding or relocating to better locations, or by those opening new offices. As a result, the Grade B vacancy rate fell by 0.5-ppt q-o-q to 2.9% in Q4 2023. The All-Grade vacancy rate dropped by 2

0.4-ppt to 2.9%, coming below 3% for the first time since Q4 2021. Tenant demand was robust for both large and small units this quarter. However, with approximately 90,000 tsubo of new office space across all grades slated for completion in 2024, the vacancy rate should begin to climb again before the end of the year.

CBRE RESEARCH

Nagoya The All-Grade vacancy rate for the quarter slid by 0.2 pp. q-o-q to 5.6%, with vacancies filled in buildings possessing superior locations or specifications on the back of strong upgrading demand. The period saw several tenants in the IT and manufacturing industries relocate to upgrade their offices; improve office location; expand floor space; open new offices; or relocate to temporary premises while their previous offices are redeveloped. New supply for the quarter consisted of just a single building featuring a little under 1,000 tsubo of floor space. Seen as providing good value for money considering its location and grade, the new property has attracted significant interest and commenced operations with a high occupancy rate. At the same time, surging construction costs and lengthening construction periods are discouraging tenants from pushing ahead with relocation plans, with many companies taking significantly longer to commit to relocations than was previously the case. This factor has also delayed pre-leasing progress at office buildings still under construction. New supply in 2024 is projected to reach 14,000 tsubo, roughly equivalent to the previous yearly average, and will include at least one Grade A building. CBRE forecasts that many of these buildings will enter operation with significant vacancies, with tenants likely to take some time to secure available units. As a result of relocations to new buildings completed last quarter, secondary vacancies are also expected to appear in existing buildings. These factors should combine to push vacancy rates up once again moving forward.

Grade A rents rose for the second straight quarter, rising by 0.8% q-o-q to JPY 26,650 per tsubo. In several buildings where vacancies were filled, or strong tenant interest was seen, previously lowered rents were raised back this quarter. However, as the supply-demand balance loosens in the coming quarters, landlords are likely to need to lower rents once more to secure tenants. CBRE forecasts Grade A rents to decline by 2.3% over the next 12 months. © 2024 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q4 2023

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

Figure 2: Vacancy Rate in 13 Cities

0%

10%

20%

Vacancy rises in some cities due to new supply but demand remains robust nationwide

(%)

－0.9

Tokyo Grade A

－0.6

Tokyo Grade B

－0.6

－0.5

－0.4

±0.0 －0.3

－0.2 ＋0.1

＋0.4 ＋0.2 ＋1.5

Rental decline ends as average rents rise in half of surveyed cities

－0.2

±0.0

＋0.6

－0.8

＋0.9

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

CBRE RESEARCH

(pts)

－0.5

The steady absorption of vacancies in existing buildings in Hiroshima saw the vacancy rate fall by 0.8 pp. q-o-q. A significant number of relocations from suburban areas and forced relocations, combined with a limited number of new vacancies, suppressed the city’s vacancy rate this quarter.

Demand for new office space from call centers and BPO operators continued to drive the market in Fukuoka. New properties added this quarter also entered operation at close to full occupancy, pushing the vacancy rate down by 0.3 pp. q-o-q.

3

Q-o-Q 0

30% Q-o-Q

15,000

30,000

JPY/tsubo

45,000

＋0.3

－0.3 Tokyo Grade A-Minus ＋0.4

In Q4 2023, the All-Grade vacancy rate rose q-o-q in six of the 10 surveyed cities, remained unchanged in one, and fell in the remaining three. Of the cities where vacancy rates rose, new supply was the primary cause in Sapporo, Saitama, Sendai, and Kobe. Sendai saw the addition of new supply roughly equivalent to twice the previous annual level, which pushed up the vacancy rate by 1.5 pp. q-o-q, the largest such increase among all regional cities. The other three cities with significant new supply maintained relatively low vacancy rates of around 2%. In Saitama, where the supply-demand balance is especially tight, pre-leasing of buildings scheduled for completion later in 2024 progressed steadily this quarter. Elsewhere, Yokohama logged an increase in the vacancy rate of just 0.1%. While downsizing in the Minato-mirai area resulted in the creation of a major secondary vacancy, this was offset by the leasing of several large vacancies to companies upgrading or expanding.

All-Grade rents for Q4 2023 rose from the previous quarter in five of the 10 surveyed cities, fell in three, and remained unchanged in the other two. In Sapporo, where the supply-demand balance remains extremely tight, rents were hiked in existing buildings, pushing All-Grade rents up by 1.0% from the previous quarter. This marked the ninth consecutive quarter in which rents set new highs in the city. Saitama also reported a fourth straight quarter of rental gains, up by 0.5% from the previous quarter. With only limited new supply slated for 2024, few landlords are prepared to lower asking rents to secure tenants. Also with Hiroshima recording a third consecutive quarter of increasing rents and a small increase registered in Fukuoka, the nationwide trend of declining rents shows signs of easing. In contrast, Yokohama recorded a rental decline of 0.1% q-o-q, marking a continuation of the trend from the previous quarter. Landlords of several buildings with large vacancies in the city have begun to demonstrate greater flexibility with respect to lease conditions.

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

＋0.2

＋0.1

－0.2

－0.3

＋0.6

＋0.8

±0.0

＋0.1

－0.1

＋0.5 ＋1.0

＋0.1

－0.2 －0.3

±0.0

＋0.2

±0.0

＋0.1

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

© 2024 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q4 2023

Figure 4: Market Summary

Vacancy Rate (%) Q-o-Q Q4 2022 Q3 2023 Q4 2023 (pts)

Q-o-Q (%)

Y-o-Y (%)

All

3.3

6.6

5.7

－0.9

＋2.4 34,700 34,550 34,650

＋0.3

－0.1

Marunouchi/ Otemachi

1.7

1.9

2.1

＋0.2

＋0.4 43,800 43,950 44,000

＋0.1

Grade A-Minus All

5.8

5.1

4.8

－0.3

－1.0

23,850 23,600 23,700

Grade B

4.6

4.3

3.7

－0.6

－0.9

21,600 21,450 21,500

Tokyo Grade A

All-Grade

4

Assumed Achievable Rent (JPY/tsubo) Y-o-Y (pts) Q4 2022 Q3 2023 Q4 2023

All

Vacancy Rate (%) Q-o-Q Q4 2022 Q3 2023 Q4 2023 (pts)

Assumed Achievable Rent (JPY/tsubo) Y-o-Y (pts) Q4 2022 Q3 2023 Q4 2023

Q-o-Q (%)

Y-o-Y (%)

Grade A

All

8.1

8.5

8.5

±0.0

＋0.4 26,500 26,450 26,650

＋0.8

＋0.6

＋0.5

Grade B

All

5.2

5.3

5.0

－0.3

－0.2

14,300 14,350 14,350

±0.0

＋0.3

＋0.4

－0.6

All-Grade

All

5.7

5.8

5.6

－0.2

－0.1

13,770 13,790 13,800

＋0.1

＋0.2

＋0.2

－0.5

Meieki

5.9

6.9

6.6

－0.3

＋0.7

18,240 18,270 18,290

＋0.1

＋0.3

7.3

7.1

6.9

－0.2

－0.4

12,720

12,710

±0.0

－0.1

Nagoya

All

4.7

5.2

4.7

－0.5

±0.0

21,420 21,270 21,300

＋0.1

－0.6

Fushimi/ Marunouchi

Central 5 Wards

4.2

4.6

4.1

－0.5

－0.1

22,650 22,480 22,500

＋0.1

－0.7

Sakae

4.2

3.9

3.8

－0.1

－0.4

13,150 13,160 13,160

±0.0

＋0.1

Marunouchi/ Otemachi

2.7

1.9

1.8

－0.1

－0.9 38,290 38,150 38,260

＋0.3

－0.1

Nagoya-Higashi

2.1

0.4

0.0

－0.4

－2.1

9,970 10,140

10,110

－0.3

＋1.4

Kanda/ Iidabashi

3.7

3.1

2.6

－0.5

－1.1

＋0.1

±0.0

All

3.2

6.9

7.0

＋0.1

＋3.8

16,290 16,150 16,130

－0.1

－1.0

2.1

2.3

3.0

＋0.7

＋0.9

15,360 15,370 15,370

±0.0

＋0.1

3.9

9.4

9.2

－0.2

＋5.3

19,270 18,690 18,600

－0.5

－3.5

20,370 20,350 20,380

Yokohama All-Grade

12,710

Yaesu/ Nihonbashi

5.9

4.5

3.4

－1.1

－2.5 22,400 22,320 22,410

＋0.4

±0.0

Around Yokohama Station

Roppongi/ Akasaka

4.7

11.1

8.5

－2.6

＋3.8

25,280 25,070 24,990

－0.3

－1.1

Minato-mirai

Toranomon/ Shiodome

4.6

5.1

5.1

±0.0

＋0.5 25,660 24,680 24,590

－0.4

－4.2

Saitama

All-Grade

2.5

1.3

1.7

＋0.4

－0.8

19,370 19,460 19,550

＋0.5

＋0.9

Shinjuku

3.9

3.4

3.4

±0.0

－0.5

22,240 22,300 22,290

±0.0

＋0.2

Sapporo

All-Grade

1.0

2.0

2.2

＋0.2

＋1.2

15,540 15,700 15,860

＋1.0

＋2.1

Shibuya/ Ebisu

2.4

2.2

2.0

－0.2

－0.4

24,780 24,610 24,610

±0.0

－0.7

Sendai

All-Grade

2.4

2.9

4.4

＋1.5

＋2.0

11,480

11,520

＋0.1

＋0.3

Shinagawa/ Tamachi

4.7

6.2

6.0

－0.2

＋1.3 20,950 20,560 20,600

＋0.2

－1.7

Kanazawa

All-Grade

14.4

14.9

14.7

－0.2

＋0.3

10,830 10,760 10,740

－0.2

－0.8

Osaki

4.2

3.1

3.4

＋0.3

－0.8

18,350 18,560 18,680

＋0.6

＋1.8

Kyoto

All-Grade

5.3

4.3

4.3

±0.0

－1.0

15,450 15,410 15,370

－0.3

－0.5

Osaka Grade A

All

4.3

3.0

2.4

－0.6

－1.9

24,250 23,950 23,900

－0.2

－1.4

Kobe

All-Grade

3.0

1.6

2.2

＋0.6

－0.8

12,020 12,090 12,090

±0.0

＋0.6

Grade B

All

3.2

3.4

2.9

－0.5

－0.3

14,750 14,700 14,650

－0.3

－0.7

Hiroshima All-Grade

6.0

5.6

4.8

－0.8

－1.2

11,790 11,830

11,850

＋0.2

＋0.5

All-Grade

All

3.5

3.3

2.9

－0.4

－0.6

14,150

14,110 14,190

＋0.6

＋0.3

Takamatsu All-Grade

7.5

6.7

7.6

＋0.9

＋0.1

9,540

9,740

±0.0

＋2.1

Umeda

4.8

4.8

3.7

－1.1

－1.1 22,030

21,870 21,750

－0.5

－1.3

Fukuoka

2.4

4.8

4.5

－0.3

＋2.1

16,050 16,050 16,070

＋0.1

＋0.1

Dojima

6.8

1.0

0.9

－0.1

－5.9

17,720 17,550 17,560

＋0.1

－0.9

Nakanoshima

2.4

2.3

2.2

－0.1

－0.2 20,250

－1.1

－2.7

Yodoyabashi

2.9

1.9

2.1

＋0.2

－0.8

17,100 17,040

17,110

＋0.4

＋0.1

Honmachi

2.9

4.8

4.1

－0.7

＋1.2

14,250 14,220 14,240

＋0.1

－0.1

Shin-Osaka

8.4

6.6

5.2

－1.4

－3.2

14,580 14,540 14,500

－0.3

－0.5

CBRE RESEARCH

19,910 19,700

All-Grade

11,510

9,740

Source: CBRE, Q4 2023

© 2024 CBRE, INC.

MARKETVIEW | JAPAN OFFICE | Q4 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

JR Kanazawa Station West 4th NK Building, 3-3-11 Hirooka, 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: 102 Osaka: 29 Nagoya: 12 (as of Q4 2023)

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Contacts

Hiroshi Okubo

Yuji Iwama

Yoshitaka Igarashi

Kumiko Ninomiya

Head of Research

Director

Director

hiroshi.okubo@cbre.com

yuji.iwama@cbre.com

yoshitaka.igarashi@cbre.com

Analyst kumiko.ninomiya@cbre.com

© Copyright 2024. 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

© 2024 CBRE, INC.