Grade A vacancy rises above 4% in Tokyo, drops below 2% in Osaka

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1 Japan Office, vacancy rises above 4% in Tokyo, drops below 2% in Osaka GDP Growth Q1 +1.4% (*Forecast) Y-o-Y BOJ Tankan DI Q1 +10pts (Large Enterprise Manufacturing) Tokyo Rent Q1 ±0.0% Q-o-Q Tokyo Q1 +1.4% Q-o-Q *JCER Forecast Figure 1 : 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% Tokyo Osaka Nagoya Forecast Figure 2 : Tokyo Osaka Nagoya 40,000 Forecast 35,000 30,000 25,000 20,000 15,000 0% Q Q Q Q ,000 Q Q Q Q Tokyo vacancy rate was up, due to new buildings which were completed with vacant space. Osaka vacancy rate, on the other hand, dropped to 1.1%, the lowest since Q The completion of a new building with close to full occupancy has prompted the tenants to speed up their search for space. Nagoya vacancy rate rose for the third consecutive quarter to 5.2%, due to vacant space in a building completed during the quarter. Demand remains robust, however, with net absorption of 25,000 tsubo. Other regional cities all recorded drop in vacancy. Of particular note, Sapporo, Kyoto, and Fukuoka recorded their respective historical lows. In Sendai, vacancy rate dropped below 6% for the first time in 10 years. March 2017 BoJ Tankan survey showed that corporate sentiment continued to improve, although they retained their cautious view on outlook. This is also apparent in the Tokyo office market, where progress in lease-ups in new Grade A buildings has been slow in recent quarters. That said, demand for prime locations and buildings basically remains solid, with corporates regarding them to be increasingly necessary in attracting and retaining talents amidst tightening labor market. CBRE expects Tokyo rents to peak in 2H 2017, before shifting to a moderate declining trend. Meanwhile, office markets in regional cities are likely to remain tight, on the back of limited supply. Osaka was of particular note this quarter, where the vacancy dropped below 2%, and rise in rents is expected to pick up pace. CBRE Research 2017 CBRE, Inc. 1

2 TOKYO ALL-GRADE VACANCY RATE RISES AGAIN The Tokyo -Grade vacancy rate increased by 0.1 percentage points (ppt), the first rise in two quarters, due to several new buildings which came on line with some space unlet. The vacancy rate increased by 1.4 ppt, the third consecutive quarterly rise. Meanwhile, vacancy rate for both the Grade A-Minus and the declined. In fact, this quarter marked the first time the Grade A-Minus vacancy rate fell below 2% since offices completed in H have been making slow progress in lease-ups, and some owners are offering extended rent-free periods or lower asking rents. As such, although rents rose in some buildings where the rents were below market average, assumed achievable rents this quarter were unchanged at JPY 35,950. At least 150,000 tsubo of new supply is expected to be completed every year between 2018 and Some of the new buildings scheduled to be completed in 2018 are expected to be fully let. However, there are concerns about vacancy in existing properties whose tenants are relocating to new buildings. Consequently, Grade A vacancy rate is likely to go on rising, and we expect rents to peak in Q before entering a period of gradual decline. Companies remain cautious on actual relocation, not only on the back of uncertainty in outlook for the global economy, but also due to the large volume of new supply scheduled in 2018 and beyond. However, as labor shortage becomes more acute, demand remains high for prime locations and/or high grade building in order to attract and retain talents. By the same token, more companies are turning to workplace strategy to appeal to their employees as well as to improve their productivity and efficiency. These trends suggest that buildings should continue to attract demand over the mid- to long-term. Figure 3 : Tokyo Market Summary Figure 4 : 12% 10% 8% 6% 4% 2% 0% -Minus Figure 5 : 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Tokyo -Minus -Grade 1.8% 2.4% +1.4ppt 0.2ppt 0.4ppt +0.1ppt 35,950 24,650 20,900 ±0.0% % -Minus CBRE Research 2017 CBRE, Inc. 2

3 OSAKA ALL-GRADE VACANCY RATE HITS RECORD LOW The -Grade vacancy rate declined by 0.7 ppt, falling to its lowest since the survey for Osaka began in The vacancy rate fell to 1.1%, while the vacancy rate fell to, both marking the lowest since Q This quarter saw the completion of Nakanoshima Festival Tower West, a building which came on line at almost full occupancy. New supply over the next three years will be extremely low, equal to only 1.5% of the existing stock. The market is expected to tighten further in the coming quarters, and the tenants are increasingly concerned about being unable to find a space. Figure 6 : Osaka Market Summary Figure 7 : 20% 15% 10% Osaka -Grade 1.1% 1.7ppt 0.3ppt 0.7ppt 20,900 11, % +1.7% Assumed achievable rents rose by 2.7% for and by 1.7% for. The rise in rents was the highest among the three major cities, reflecting the fact that Osaka will have the least new supply among the three cities, in terms of % of existing stock. 5% 0% NAGOYA VACANCY RATE NOW LOWEST IN 16 YEARS The -Grade vacancy rate dropped below 4% for the first time in nearly 16 years. The completion of two buildings in the Nagoya Station area drove relocations by large tenants, including an IT company and a financial institution. Companies are opening new offices or upgrading their locations in order to enhance recruitments and retentions. That said, one of the two new buildings had some space still available, which pushed up the vacancy rate for the third consecutive quarter. The coming quarters may see some space come onto the market, as their tenants have moved into the new buildings. However, they are unlikely to take too long to let. Demand is likely to come from companies looking to consolidate, relocate from the suburbs, or having to move to make way for rebuilding. Figure 8 : Nagoya Market Summary Nagoya -Grade 5.2% 3.9% Figure 9 : 16% 14% 12% 10% 8% 6% 4% 2% 0% +1.2ppt 0.3ppt 0.2ppt 23,800 12, % +1.2% CBRE Research 2017 CBRE, Inc. 3

4 SAPPORO NEWLY COMPLETED BUILDINGS FULLY LET AS MARKET REMAINS TIGHT Figure 10 : Sapporo -Grade 0.7% 0.1ppt 12,090 + The vacancy rate declined by 0.1 ppt to 0.7% in. One large-scale building completed this quarter was almost fully let despite it commanding rents well above prevailing market levels. of the spaces vacated by tenants moving to the new building have also been re-let. With the demand robust and no space available in the city centre, some occupiers with plans for expansion are having to widen their scope to include surrounding areas. Assumed achievable rents exceeded JPY 12,000 for the first time since Q Vacancy is set to remain low, and the rent is likely to rise further. SENDAI VACANCY RATE BELOW 6% FOR FIRST TIME SINCE Q Figure 11 : Sendai -Grade 5.5% 0.6ppt 9, % The vacancy rate in Sendai dropped below 6% for the first time in nearly ten years. Notable deals included IT companies opening new offices, as well as a company moving to city central at the same time selling its obsolete suburban building. Most of these deals were closed even before the owners began marketing the spaces. A new building due for Q completion is also expected to come on line fully let. Rents continued to rise, led by recently built buildings where occupancy has improved. There is less scope for tenants to negotiate rents for space even for medium-sized buildings. SAITAMA MARKET TIGHTENS FURTHER AS VACANCY RATE FALLS BELOW 1% Figure 12 : Saitama -Grade 0.6% 0.8ppt 15, % The vacancy rate declined 0.8 ppt to 0.6%, the first time it dropped below 1% since The period continued to see companies opening new offices, and/or upgrading their locations to the Omiya Station area. Insurance companies were especially active this quarter. The market tightened further, with spaces being filled even before they are put on the market. Tenants who could not secure larger space are coping by changing their office layouts. Assumed achievable rents rose 0.6%. With little availability, owners are increasingly bullish on rents. The market is likely to remain tight as no supply is scheduled for the next four years. YOKOHAMA SEVERAL COMPANIES MOVE TO LARGER OFFICES AROUND YOKOHAMA STATION Figure 13 : Yokohama -Grade 0.8ppt 14, % The vacancy rate declined 0.8 ppt, driven by professional services and financial institutions seeking larger space. An especially large amount of space was let in the Yokohama Station area, where the vacancy rate dropped 1.1 ppt to, falling below 3% for the first time in 10 years. Minato Mirai area saw a large-scale building come on line fully let. Assumed achievable rents in rose by 1.2% to JPY 14,290 per tsubo driven by mid-sized buildings. There is strong demand from customer-facing tenants, e.g. in the service sector, and rents are likely to continue rising especially in the Yokohama Station area. CBRE Research 2017 CBRE, Inc. 4

5 KANAZAWA SOLID DEMAND PUSHES UP RENTS KYOTO DEMAND REMAINS FIRM DESPITE LACK OF AVAILABILITY Figure 14 : Kanazawa -Grade 8.3% ±0.0ppt 9,810 + The vacancy rate was unchanged. The period did see solid demand from companies wanting to relocate from the suburbs to the Kanazawa Station area, but there are few large units available in the area. With small tenants looking to open new offices, and companies planning to relocate from obsolete suburban buildings, demand for office space is likely to remain firm in the coming quarters. Figure 15 : Kyoto -Grade 1.4% 0.7ppt 12, % The vacancy rate hit a record low for the fifth consecutive quarter, falling to 1.4%, on the back of tenants continuing strong appetite for space. Even several buildings in slightly inconvenient locations reached full occupancy, with tenants opening new offices or moving to make way for rebuilding. Given scarce availability, some companies had to re-examine their plans for moving or new openings. Assumed achievable rents rose by. Lack of large spaces around Kanazawa Station has prompted more owners to raise asking rents also in other areas and for medium-sized buildings. Assumed achievable rents rose 2.4% to JPY 12,140, marking the first time since Q to exceed the JPY 12,000 mark. More tenants, prioritizing space securement, are agreeing to higher rents offered by the owners. KOBE DEMAND SPREADS BEYOND SANNOMIYA STATION AREA Figure 16 : Kobe -Grade 5.6% 0.1ppt 10,780 ±0.0% The vacancy rate declined by 0.1 ppt to 5.6% in. As in the previous quarter, occupier activity was limited due to there being no large units available around Sannomiya Station, where tenants are finding it increasingly difficult to find space. As a result, tenants are now expanding their scope of search to include surrounding areas. Assumed achievable rents were unchanged. Although rents rose around Sannomiya Station, this was offset by drop in rents for obsolete buildings or those in particularly inconvenient locations. However, as the demand spreads to wider area, overall rents could begin to rise again. HIROSHIMA VACANCY RATE DECLINES DESPITE TENANTS CAUTIOUS APPROACH Figure 17 : Hiroshima -Grade 0.3ppt 10, % Although the vacancy rate declined this quarter, occupier activity was limited due to lack of space sufficient to meet demand. An increasing number of tenants therefore adopted a wait-andsee approach ahead of the completion of a new building this autumn. The quarter also saw a number of take-ups in relatively expensive or poorly located buildings, simply because they had large units available. Assumed achievable rents rose 0.7%, a slow-down vis-a-vis the 3.6% y-o-y rise for 2016 as a whole. It appears that rents for aged buildings, which account for a large portion of Hiroshima office market, are more or less at their peak. CBRE Research 2017 CBRE, Inc. 5

6 TAKAMATSU VACANCY FALLS BUT RENTAL GROWTH REMAINS FUKUOKA VACANCY RATE FALLS TO RECORD LOW LIMITED Figure 18 : Takamatsu -Grade 9.6% 0.2ppt 8, % Despite the decline in the vacancy rate, activities remain mixed. On a positive note, a heavy machinery company was seen relocating for BCP purposes, and new offices were opened by an industrial machinery company and a recruitment agency. On the other hand, several companies withdrew from Shikoku as a whole, including Takamatsu, to consolidate their offices in Osaka or Okayama. Assumed achievable rents rose by just 0.2%. With the vacancy still close to 10%, it is difficult even for relatively high grade buildings to raise rents. Most tenants sentiment is a long way from anticipating any rent rise. Figure 19 : Fukuoka -Grade 0.5ppt 12, % The vacancy rate declined by 0.5 ppt to, marking the eighth consecutive quarterly low since the survey for Fukuoka began in The period saw several large units let to tenants who were forced to move because of rebuilding plans, while a number of buildings achieved full occupancy as small units were let despite their location, size or specifications. The acute shortage of space is likely to persist in the long term. Assumed achievable rents rose by 2.8%. Rents have now risen by nearly 3% for two consecutive quarters. Current pace of rental increases is set to continue as the market is expected to remain tight. BUILDING GRADE DEFINITION -Grade -Minus Location Tokyo: Central 5 Wards* Osaka, Nagoya: Major wards Tokyo 23 Wards Tokyo 23 Wards Osaka Nagoya Office area in 13 cities nationwide set by CBRE Size GFA: 10,000 tsubo or more NLA: 6,500 tsubo or more Typical floor plate: Greater than 500 tsubo** GFA: 7,000 tsubo or more NLA: 4,500 tsubo or more Typical floor plate: Greater than 250 tsubo (except ) GFA: 2,000-7,000 tsubo Typical floor plate: Greater than 200 tsubo GFA: 2,000 tsubo or more (except ) GFA: 1,000 tsubo or more Age Less than 11 years 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 CBRE Research 2017 CBRE, Inc. 6

7 Figure 20 : Market Summary Tokyo Osaka Nagoya Yokohama Saitama Sapporo Sendai Kanazawa Kyoto Kobe Hiroshima Takamatsu Fukuoka -Minus Marunouchi/Otemachi Central 5 Wards Marunouchi/Otemachi Kanda/Iidabashi Yaesu/Nihonbashi Roppongi/Akasaka Toranomon/Shiodome Shinjuku Shibuya/Ebisu Shinagawa/Tamachi Osaki Umeda Dojima Nakanoshima Yodoyabashi Honmachi Shin-Osaka Meieki Fushimi/Marunouchi Sakae Nagoya-Higashi Around Yokohama Station Minato-mirai 1.4% 2.7% 1.3% 2.5% 2.0% 2.0% 1.2% 3.1% 4.8% 4.4% 5.3% 3.7% 3.3% 4.6% 7.4% 9.9% 3.4% 3.6% 2.6% 4.3% 4.7% 9.1% 4.6% 5.0% 7.2% 11.2% 6.2% 11.4% 2.4% 1.9% 2.7% 2.8% 1.2% 1.4% 2.5% 2.7% 2.7% 2.4% 2.5% 2.0% 1.1% 1.2% 2.0% 2.4% 2.0% 2.0% 1.2% 1.2% 0.7% 2.4% 2.4% 2.4% 4.5% 4.5% 4.0% 3.7% 4.9% 4.6% 3.4% 4.3% 4.6% 5.3% 6.2% 5.7% 9.1% 9.3% 2.8% 3.3% 3.8% 3.4% 4.1% 4.1% 2.4% 3.1% 4.5% 4.4% 5.1% 4.4% 7.4% 6.8% 4.3% 4.4% 4.3% 4.0% 4.3% 4.7% 1.6% 1.5% 1.1% 6.7% 6.9% 10.4% 9.8% 5.9% 6.0% 2.8% 3.3% 10.5% 10.0% 1.1% 2.0% 2.5% 1.8% 0.8% 2.7% 1.4% 2.8% 3.9% 4.0% 4.1% 7.9% 4.0% 4.1% 3.7% 3.6% 4.3% 6.8% 3.8% 3.3% 1.4% 0.8% 6.1% 8.3% 5.7% 3.3% 9.8% 1.5% 3.1% 1.8% 2.4% 2.0% 1.2% 6.1% 2.4% 2.8% 1.2% 1.1% 1.6% 7.0% 5.2% 3.9% 4.5% 3.6% 5.9% 3.6% 0.6% 0.7% 5.5% 8.3% 1.4% 5.6% 9.6% Assumed 34,900 35,400 35,750 35,950 35,950 45,650 24,150 20,550 20,150 11,250 23,650 12,050 13,830 13,190 16,460 15,510 11,080 9,510 9,580 11,500 10,650 10,060 8,720 11,250 45,700 24,350 20,650 20,150 11,350 23,650 12,050 13,920 13,280 16,560 15,650 11,340 9,550 9,620 11,590 10,680 10,200 8,730 11,500 45,900 24,400 20,700 20,200 11,550 23,550 12,100 14,010 13,330 16,800 15,730 11,520 9,570 9,680 11,660 10,740 10,250 8,760 11,640 45,850 24,400 20,800 20,350 11,650 23,500 12,150 14,120 13,470 16,800 15,880 11,830 9,600 9,710 11,850 10,780 10,370 8,770 11,940 46,000 24,650 20,900 20,900 11,850 23,800 12,300 14,330 13,610 17,150 15,980 12,090 9,630 9,810 12,140 10,780 10,440 8,790 12,270 CBRE Research 2017 CBRE, Inc. 7

8 FOR MORE INFORMATION ABOUT THIS JAPAN OFFICE MARKETVIEW, PLEASE CONTACT CBRE OFFICES IN JAPAN JAPAN RESEARCH Hiroshi Okubo Head of Research Koichi Suzuki Senior Director Takeshi Yamaguchi Associate Director Naoko Kaihata Associate Director Hisari Asai Analyst To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at TOKYO Meiji Yasuda Seimei Building Marunouchi, Chiyoda-ku, Tokyo SHIBA PARK Shiba Park Building B Shibakoen, Minato-ku, Tokyo OSAKA Osaka Kokusai Building Azuchimachi, Chuo-ku, Osaka-shi, Osaka SAPPORO Hokkaido Building 4-1 Kitanijonishi, Chuo-ku, Sapporo-shi, Hokkaido SENDAI Sendai Mark One Chuo, Aoba-ku, Sendai-shi, Miyagi YOKOHAMA Yokohama ST Building Kitasaiwai, Nishi-ku, Yokohama-shi, Kanagawa KANAZAWA Aube II Building Kuratsuki, Kanazawa-shi, Ishikawa NAGOYA Miyuki Building Nishiki, Naka-ku, Nagoya-shi, Aichi HIROSHIMA Shishinyo Building 3-17 Fukuromachi, Naka-ku,Hiroshima-shi, Hiroshima FUKUOKA Fukuoka Center Building Hakata-Ekimae, Hakata-ku, Fukuoka-shi, Fukuoka TERMS AND DEFINITIONS Space Measurement Surveyed Buildings Surveyed Period Assumed Floor Space of New Supply Net Absorption Samples (as of ) 1tsubo= square meters=35.58 square feet 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. 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 Annual Vacancy rate: End of December each year Assumed achievable rents: January to December each year Vacancies are those that are ready to receive tenants at time of survey Assumed achievable rent of floorplate (including common area maintenance fee) Leasing floor space 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 79, Osaka 26, Nagoya 10 Disclaimer: materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only, exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorised publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication.