Office Sector

TOKYO

Strong corporate performance continues to urge relocations to upgrade building and location. However, the vacancy rate is expected to start rising in 2018 due to new supply which is likely to exceed net absorption. Tokyo office market is expected to see a moderate shift from landlords’ market to occupiers’ market.

Corporate earnings are expected to hit a record high driven by recovery in global economy and relatively stable currency. Corporate capital expenditure has been solid, and the office sector has seen companies in an expansionary mode. The unemployment rate fell below 3% for the first time since 1994, and the labour shortage is becoming increasingly acute. Many companies planning to hire more staff are considering relocating to locations with good transportation convenience or to higher grade buildings, in order to attract and/or retain talents. Office demand is particularly strong among IT-related firms, where robust growth is envisaged in areas such as Internet of Things (IoT) and e-commerce. Demand also remains solid among manufacturers, as well as professional services firms. Net absorption in 2017 recorded 170,000 tsubo, exceeding new supply of 141,000 tsubo. As a result, the All-Grade vacancy rate looks set to fall 0.7pts y-o-y to 1.5% at the close of 2017, the first time in 10 years that the vacancy rate has been below 2% at the end of a year.

However, large-scale new supply is expected from 2018 to 2020, averaging 233,000 tsubo in the two-year period in 2018 and 2019, almost 30% higher than the 10-year annual average of 180,000 tsubo. In addition, 300,000 tsubo of new supply is scheduled for completion in 2020. Furthermore, Grade A buildings account for as much as 70% of the new supply. While occupier interest in high-spec buildings remains solid, companies are highly cost-conscious in view of future political and economic uncertainty, as well as the possibility of tight labour market.

For this reason, even among larger buildings, swift takeups are only seen in relatively inexpensive premises, or those that are not yet completed and where tenants can more easily extract favourable terms. While it is estimated that tenants have been secured for around 50–60% of the space scheduled for completion in 2018 (as of November, 2017), many of these tenants are relocating from an existing large-scale buildings, where vacancy could gradually build up. All-Grade vacancy rate is expected to swing upward early in the New Year and rise to 2.3% at end-2018 and 2.8% at end-2019, versus 1.5% at end-2017. Additionally, the economy could enter a recessionary phase in 2020, when the 300,000 tsubo of new supply is scheduled for completion. With higher supply and potential drop in demand, vacancy rate may rise further.

The Grade A vacancy rate is expected to fall 0.7 points y-o-y to 2.1% by the close of 2017. Buildings that were newly completed in 2017 are almost fully let. New supply will amount to 207,000 tsubo in 2018, more than double the 10- year annual average of 93,000 tsubo, and including. Half of the new supply in 2018 is located in the Marunouchi / Otemachi area, although tenants have already been secured for virtually all new space in this location. In other areas, some properties are taking longer time to let, and some are likely to have vacant space upon completion. The Grade A vacancy rate is forecast to rise 1.9 points y-o-y to 4.0% at the end of 2018, and by 2.7 points y-o-y at the end of 2019 to 4.8%. At the close of 2017, Grade A assumed achievable rent is expected to have increased 1.4% y-o-y to JPY 36,450 per tsubo, a rate of increase far below last year's +4.4%. Grade A rents are forecast to take a downturn in 2018, and are expected to fall by 8.2% by the end of 2019 compared with end-2017. In 2020, which will see the biggest new supply in the next three years and a potential negative growth in economy, rents are expected to fall further.

The Grade A-Minus vacancy rate is expected to fall 0.6 points y-o-y to 1.4% by the close of 2017. A total of 67,000 tsubo of new supply is scheduled for 2018 and 2019. 2017 saw many cases of tenants relocating from Grade A-Minus buildings to new Grade A buildings. Even so, the space left vacant was filled by companies requiring additional space. However, with the increase in supply of Grade A buildings, vacancy is likely to steadily build up at existing Grade A– Minus premises. As such, the Grade A-Minus vacancy rate is forecast to rise to 1.7% by end-2018 and to 2.6% in 2019. Grade A–Minus rent is expected to fall by 6.9% versus end- 2017.

The Grade B vacancy rate is expected to fall 1.1 points y-o-y to 1.4% by the close of 2017. Only averaged 27,000 tsubo of new supply is scheduled for completion in 2018 and 2019 – 84% of the last 10-year average. Grade B vacancy rate is likely to remain at around 1.8%, even at the end of 2019. Drop in Grade B rent is expected to be limited to around 4.0% by the end of 2019 (versus end-2017).

2017 was a year of unparalleled growth in demand in the Osaka office market. Demand from occupiers seeking to upgrade their location and/or building was buoyant, with vacancy rates falling to historic lows across all grades. Net absorption in 2017 is expected to be second only to the 80,000 tsubo recorded in 1993. As a result, the All-Grade vacancy rate is expected to stand at 2.4% at the close of 2017, the lowest level since CBRE's surveys began in 1993.

Demand is forecast to remain strong in 2018 and beyond. Meanwhile, new supply during 2018–19 is forecast to be averaged only 5,000 tsubo, a mere 15% of the 10-year annual average of 33,000 tsubo. As a result, the All-Grade vacancy rate is forecast to be 2.4% at the close of 2019, the same as at the close of 2017.

Supply-demand conditions look set to remain tight, meaning that rents are expected to continue rising. Grade A rent is forecast to rise by 4.1% to JPY 22,850 per tsubo by the close of 2019 (versus end-2017). Grade B rent is also expected to rise by 8.8% to JPY 13,550 per tsubo. These gains significantly exceed those forecast for Tokyo and Nagoya.

NAGOYA

Space in the two Grade A buildings completed in Q1 2017 was leased to financial institutions consolidating their premises as well as several manufacturers looking to improve their locations. Buildings left vacant by tenants moving to these new properties were also filled as new tenants relocated from the suburbs. In 2017, net absorption outstripped supply at 32,000 tsubo against new supply of 26,000 tsubo. As a result, the All-Grade vacancy rate is expected to have fell below 3% at the close of 2017, marking the first time it has done so since Q1 1999.

Demand among tenants for new offices and relocations are expected to remain strong in 2018 and beyond. One Grade A building to be completed in 2018 is expected to be almost fully let with a tenant moving out from their own building slated for reconstruction. As no large-scale supply is scheduled for completion in 2019, space should continue to be filled, and rents to continue rising.

The Grade A vacancy rate is forecast to fall 0.8 points to 1.8% by the close of 2019 (versus end-2017), while rents are expected to rise by 2.2% to JPY 25,050 per tsubo. Rents are expected to surpass JPY 25,000 for the first time since 2009. The Grade B vacancy rate is forecast to fall 0.6 points to 1.7% by the close of 2019 from end-2017, while rents are expected to rise by 7.5%.

OFFICE SECTOR, REGIONAL CITIES

SAPPORO

In 2017, a newly constructed building, the first since 2015,was fully let upon completion. No vacancy arose at existingbuildings, ensuring the vacancy rate to remain at close to0%. Demand for new offices or larger premises remainsstrong. Two new buildings scheduled for completion in2018 and 2019 are eagerly awaited, and both are expectedto open with high levels of occupancy.

SENDAI

2017 saw one new building, the first since 2014, which wasalmost fully let on completion. Existing spaces were alsofilled at a faster pace, including those left vacant by tenantsmoving to the new building. In addition to upgrades ofpremises and expansions, there was also strong demand toestablish new offices. With no new supply scheduled for thenext two years, rents are expected to rise at a rapid pace.

SAITAMA

The vacancy rate stood close to 0% throughout 2017. Theyear saw more tenants relocating from the suburbs to theOmiya Station area. Whenever a tenant decides to move outfrom a premise, replacement tenants are being found evenbefore the vacant space is advertised. Supply-demandconditions are expected to remain tight, with further upsidein rents.

YOKOHAMA

In H1 2017, a large-scale building was completed in theMinato Mirai area, marking the first new supply in threeyears. The building opened fully let, and the vacancy ratesubsequently fell to 2.9% in Q2 2017. In H2 2017, anotherlarge-scale building was completed in the same area withsome space still unlet, causing the vacancy rate to rise.However, given the strong demand for relocation fromcompanies in the suburbs, the available space is expected tobe steadily filled. As the occupancy rates in these buildingsincrease, the overall rent level is likely to gradually rise.

KANAZAWA

Rents exceeded JPY 10,000 for the first time in nine years. Inan attempt to attract and retain talent, tenants are focusingmore on higher-grade locations and buildings, even athigher rent levels. The vacancy rate is expected to fallfurther, mainly in the Kanazawa Station area, due todemand for relocation from the suburbs. Rents should alsorise steadily.

KYOTO

2017 saw brisk leasing activity among tenants seeking newopenings or expansions, and the vacancy rate fell below 1%.Tenants are finding it difficult to secure space even if theyrelaxed their criteria. Existing buildings are being convertedinto hotels or other use, resulting in a decline in office stock.With no new supply in the pipeline, rents are expected tocontinue rising over the next two years.

KOBE

Space continued to be filled as tenants relocated to upgradeand/or consolidate premises. The vacancy rate fell below 5%for the first time since CBRE's survey started in Q4 1996.There is no available space in the Sannomiya Station area,and other areas are also seeing a continued stream ofcompanies moving from the suburbs. The vacancy rate isexpected to fall further and rents will likely continue to rise.

HIROSHIMA

In 2017, a newly constructed building, the first since 2012,was completed almost fully let as several large tenantsrelocated from the suburbs. The year saw strong demand,leading to a fall in the vacancy rate to around 3%. Two newbuildings are scheduled for completion in 2019. One ofthese, Hiroshima Futabanosato Project, is a development inan up-and-coming area attracting attention from tenants.Rents are expected to continue gradually rising.

TAKAMATSU

The vacancy rate continued to trend sideways over thecourse of 2017. While the year saw an increase in demandfor new openings and upgrades, there were alsocompanies which decided to withdraw from Shikoku. Thevacancy rate remains around the 9% level. As manytenants are considering relocating from the suburbs, thevacancy rate is expected to drop and rents to rise, althoughat a moderate pace for both.

FUKUOKA

2017 saw brisk demand from tenants seeking expansions.The vacancy rate fell below 1% as spaces were filled at anaccelerated pace, as some tenants are having to move outof their building for the Tenjin Big Bang Project. Theincrease in rent over the course of the year was again thefastest among all cities in Japan surveyed by CBRE. Whileover 6,400 tsubo is slated for completion between now and2019, this is unlikely to meet the current level of demand.