Office Leasing. Savills Research

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1 November 1, 21 "Leasing activity remains strong in the third quarter as central Tokyo office fundamentals show continued signs of improvement. Assuming the market suffers no external shocks, modest rental growth may be seen over the coming quarters." Image: Nihonbashi Mitsui Tower, Chuo-ku, Tokyo Leasing activity in Tokyo s office market remained strong in Q3/21, bolstered by consolidations and relocations capitalising on historically low rents across the market. Five deals with GFAs of more than 12, sqm were completed during the quarter, including the lease of a 35,4 sqm space to Sumisho Computer Systems in Koto Ward and a 33, sqm deal involving electronics firm Renesas in Chiyoda Ward. Q3 saw the rate of decline in average Grade A and Grade B office rents continue to moderate. Both property grades experienced negative rental growth of approximately 1.4 per cent quarter-on-quarter, compared with declines of 2.1 per cent and 3.1 per cent respectively in Q2. Assuming no signifi cant external market shocks occur, rental change is expected to level off or even return to positive territory over the coming quarters. The average Grade A vacancy rate for Tokyo s central five wards was 5.3 per cent in Q3, representing a fall of 3 bps from the preceding quarter. The average Grade B vacancy rate rose a nominal 7 bps from the second quarter to 6.81 per cent. Limited speculative development combined with demand from firms looking to benefit from the favourable leasing terms currently on offer is expected to support prime central Tokyo occupancy levels in the short term. Savills Research

2 Tokyo Leasing Market Update Amid concerns about the sustainability of Japan s nascent economic recovery, leasing activity in Tokyo s offi ce market remained strong through the third quarter. Key leasing agreements were characterised by fi rms taking space to facilitate office rationalisation and consolidation, as well as to take advantage of historically low rents across the market. Indeed, fi ve deals for over 12, sqm (3,6 tsubo) of fl oor space were reported between July and September, all involving domestic fi rms looking to achieve cost savings and greater effi ciencies in their offi ce portfolios. The largest occupier deal completed in Q3/21 saw Sumisho Computer Systems Corporation take almost 35,4 sqm (1,7 tsubo) at Mitsubishi Estate s recently completed Toyosu Front building in Koto Ward. Following recent absorption-type mergers, the IT services company will expand from its existing space at Harumi Island Triton Square Offi ce Tower Z, its current headquarters building in Chuo Ward. The merger of Renesas Electronics Corporation and NEC Electronics earlier this year similarly prompted the quarters second largest letting. The new entity, operating under the Renesas name, will consolidate operations from its former Kawasaki head offi ce and elsewhere within approximately 33, sqm (1, tsubo) at the Otemachi Nihon Building in Chiyoda Ward. Notable Transactions, Q3/21 Company Sumisho Computer Systems Corp. Renesas Electronics Corp. NEC Networks & Systems Integration Group Asahi Glass Co. World Gormet Navigator Google KVH Pacifi c Consultants Co., Ltd Regal Corp. New Locations Ward Former Locations Area (tsubo/ sqm) Toyosu Front Koto Triton Square 1,7 / Tower Z Building 35,38 Otemachi Nihon Iidabashi First Tower Shin-Marunouchi TK Minami- Aoyama Chiyoda Bunkyo Chiyoda Minato Kawasaki Head Offi ce, etc. Canalside Shibaura Square Shin Yurakucho Several locations incl. World Aoyama Toho Hibiya Chiyoda Shin-Kokusai / Shin- Yurakucho / Nittobo Roppongi Hills Mori Tower Sumitomo Fudosan Tamachieki-mae Shinjuku Oak Tower Urayasu Shinhonsha 1, / 33,6 5,3 / 17,52 5,14 / 17, Type Relocation / / Relocation 3,63 / 12, 2,3 / 7,6 Minato Cerulean Tower 2, / 6,61 Minato Akasaka DS / Shin Aoyama 6 Shinjuku Odakyu Dai-ichi Seimei Urayasu-shi Senju HQ / Ichigaya Azumi etc. 1,62 / 5,365 1,6 / 5,29 1,5 / 4,96 Relocation / / Relocation Q3 saw the rate of decline in average Grade A and B offi ce 1 rents in Tokyo s central fi ve wards continued to moderate, supporting the wider market view that the offi ce sector has hit the bottom of the current rental cycle. Both property grades experienced negative rental growth of around 1.4 per cent between July and September; this compares with declines of 2.1 per cent and 3.1 per cent respectively in Q2. Assuming no signifi cant external market shocks occur, rental change is expected to level off or even return to positive territory over the coming quarters. Quarter-on-Quarter Percentage Change in Rents for Grade A and B Office Buildings in Tokyo s Central 5 Wards, Q3/28 Q3/21 % -2% -4% -6% -8% -1% -12% -14% Grade A Rents Grade B Rents While the average Grade B rent has remained around 77 to 8 per cent of the Grade A average since Q3/28, rental decline across the market has seen the difference in terms of yen per tsubo fall from approximately JPY1, to JPY5,7 (a drop of about 43 per cent) over the two year period. This moderation of the rent differential has provided an incentive to offi ce tenants to trade up to higher grade properties and/or more prestigious locations at a historically low premium. 1 Grade A offi ce refers to buildings located in the central fi ve wards of Tokyo with a GFA of 3, sqm (9, tsubo) or higher and a building age of less than 15 years. Grade B offi ce refers to buildings with a GFA of 15, sqm (4,5 tsubo) with a building age of less than 25 years. Some buildings are included that do not fi t this defi nition. Over 2 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. I 2

3 Average Rents and Vacancy Rates for Grade A and B Office Buildings in Tokyo s Central 5 Wards, Q3/28 Q3/21 Grade A Vacancy (RHS) Grade B Vacancy (RHS) Grade A Rents (LHS) Grade B Rents (LHS) 5, JPY per tsubo % 45, 4, 35, 3, 25, 2, 15, 1, 5, At the ward level, the average Grade A offi ce rent in Chiyoda, Tokyo s most expensive business district, experienced the smallest rental decline over the quarter, dipping just.6 per cent to stand at JPY34,7 per tsubo. This compares to a fall of 1.5 per cent during the previous quarter. Moderation of rental decline was similarly recorded in Chuo, Minato, Shinjuku and Shibuya wards, where quarterly change ranged between -1.1 per cent (Shinjuku) and -2. per cent (Shibuya). Chiyoda Ward s status as the most desirable location remains an important feature of the central Tokyo offi ce market. Average Grade A rents in the ward were approximately 24 per cent higher than the next most expensive ward, Minato, and 35 per cent higher than the cheapest of the central fi ve wards, Shinjuku. In fact, the average Grade B rent for Chiyoda in Q3 was about 13 per cent higher than Shinjuku s average Grade A offi ce rent. Average Grade A Rent by Ward, Q3/28 Q3/21 6, 5, 4, 3, 2, 1, Chiyoda Chuo Minato Shinjuku Shibuya JPY per tsubo The average Grade A offi ce vacancy rate for Tokyo s central fi ve wards was 5.3 per cent in Q3, representing a fall of 3 bps from the preceding quarter. The average Grade B vacancy rate rose a nominal seven bps from the second quarter to stand at 6.81 per cent. At the ward level, the Grade A market witnessed its largest contraction in Chiyoda, where a decline of 8 bps brought the overall vacancy level down to 4.6 per cent. This compares to a slight rise of about 3 bps in adjacent Chuo Ward. The largest change in the Grade B market occurred in Shinjuku Ward, where there was a quarter-on-quarter increase in the vacancy rate of about 4 bps. The leasing market is expected to remain challenging through Q4/21 and into 211; however, low volumes of speculative completions and demand from fi rms located in lower grade buildings or outside of the central fi ve wards looking to capitalise on the favourable leasing terms currently on offer are expected to support the market in the short term. Savills monitors rents and vacancy levels in over 28 buildings located in Tokyo s central fi ve wards with a GFA of 1, sqm or above. Unlike similar market information issued by other research institutions, the rental data provided relates to achievable rents as opposed to asking rents, whilst vacancy fi gures refl ect current vacant space without the inclusion of expected vacancy, or that reported prior to tenants vacating their premises. As a consequence, benchmark fi gures, particularly vacancy rates, tend to be somewhat lower than other market indices. Tokyo Investment Market Update According to Real Capital Analytics and other market sources, a total of 43 offi ce properties were transacted in Q3/21. While most of the deals concluded were in the range of JPY1-4 billion, seven assets were transacted at over JPY5 billion. The largest investment transaction recorded comprised the JPY34 billion sale of Fuji Heavy Industries 2,385 sqm (6,166 tsubo) Shinjuku Subaru Building to Odakyu Electric Railway. The maker of Subaru brand vehicles plans to lease the 44-year old building as a tenant whilst another offi ce building it owns in Ebisu, Shibuya Ward, is reconstructed. Most of the company s headquarter operations are expected to be transferred to the new building from October 214. Over 2 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. I 3

4 The next most expensive transaction comprised developer-owner Mori Building s acquisition of the Toranomon 35 Mori Building from its J-REIT subsidiary, Mori Hills REIT. At JPY12.68 billion, the sales price refl ected a yield of 5.4% based upon actual NOI fi gures as of February this year. Although the building is currently fully occupied by Omron Corporation, the healthcare company has announced plans to relocate its head offi ce to another location, possibly to a building currently under development by Chunichi Newspaper near Shinagawa Station. As the parent company, this factor was arguably a key motivating factor behind Mori Building s decision to acquire the building, as Mori Hills REIT s possession of a vacant building would negatively impact upon the REIT s stock price and dividends. For further information, please contact: japan Christian Mancini Managing Director, CEO cmancini@savills.co.jp japan Koji Naito Associate Director, Research knaito@savills.co.jp research & consultancy, asia pacific Simon Smith Senior Director ssmith@savills.com.hk address Savills Japan Co., Ltd. CR Kamiyacho Building 1F Azabudai, Minato-ku, Tokyo Japan T: F: corporate website This document is prepared by Savills for information only. Whilst reasonable care has been exercised in preparing this document, it is subject to change and these particulars do not constitute, nor constitute part of, an offer or contract; interested parties should not rely on the statements or representations of fact but must satisfy themselves by inspection or otherwise as to the accuracy. No person in the employment of the agent or the agent's principal has any authority to make any representations or warranties whatsoever in relation to these particulars and Savills cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. This publication may not be reproduced in any form or in any manner, in part or as a whole without written permission of the publisher, Savills. Savills (Hong Kong) Limited. 21.

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