Japan's office market demand is on the rise as Spring approaches, according to a new report by CBRE.
Japan's office vacancy rates declined q-o-q in nine of the 13 cities surveyed this quarter. Some companies are relocating from the suburbs or from obsolete buildings but demand for larger offices caused by expansion strengthened again in 2015. In cities and areas with little vacant space, numerous companies are opening separate offices or taking additional space as soon as other tenants move out, in order to secure space. In Saitama, secondary vacancies increased as tenants relocated to new buildings. However, vacant space is steadily being filled as companies move to better locations or take additional space.
Assumed achievable rents rose in 12 out of 13 cities in Q1 2015, with the exception of Takamatsu. Rental growth accelerated, with q-o-q rises of 3.3% in Kanazawa, where the Shinkansen line opened in March; 3.0% in Sapporo; and 1.9% in Fukuoka, where the vacancy rate fell below 5.0% in Q1 2015. In Tokyo, rents rose across all grades and also continued to rise in other areas of Greater Tokyo, including Saitama and Yokohama.
Japan Q1 2015 Office Market Overview:
All-grade vacancy rate in Tokyo fell 0.2 points q-o-q to 3.9%, a six-year low
Tokyo Grade A vacancy rate rose temporarily, up 1.0 points q-o-q to 5.1%
Osaka Grade A vacancy rate improved by 0.9 points q-o-q to 7.2%
Nagoya Grade B vacancy rate falls 0.6 points q-o-q to 4.5%, falling below 5% for the first time in seven years
Rental increases gathered pace in several regional cities
Tokyo 23 Wards
In Q1 2015 the all-grade vacancy rate for Tokyo's 23 wards declined by 0.2 points q-o-q to 3.9%. This was the first time in six years that the vacancy rate fell below 4.0%, the previous occasion being Q1 2009. Office demand slowed somewhat at the end of 2014 but revived this quarter. The period saw strong demand for office expansion across a wide range of sectors including Japanese financial institutions and manufacturers. An increasing number of tenants are taking additional space in their existing buildings or moving to larger offices. In addition to group companies moving to single sites and tenants moving to redeveloped offices, some companies moved to central Tokyo to improve on their location. As there are only a few large vacant spaces, companies are starting to show more interest in cheaper, larger buildings.
The Tokyo Grade A vacancy rate rose by 1 point q-o-q to 5.1% in Q1 2015. This was mainly due to the completion of Shinagawa Season Terrace, which came online this quarter with a sizable volume of vacant space. However, an increasing number of areas have vacancy rates below 2.0%, as a large amount of vacant space has been filled in new buildings or older buildings with secondary vacancies. The choice of offices to relocate to is rapidly diminishing, with a vacancy rate of just 1.0% in the Marunouchi/Otemachi area, 1.7% in the Yaesu/Nihonbashi area and 1.1% in the Roppongi/Akasaka area. Grade A assumed achievable rents rose 2.3% q-o-q to JPY32,950 per tsubo. Even in Marunouchi/Otemachi, Grade A assumed achievable rents rose a hefty 2.8% q-o-q to JPY43,800 per tsubo.
"A large number of companies took additional space in their existing buildings in Q1 2015, and most of these tenants seem to have agreed to rents in line with the owner's terms," said Hideki Maruyama, executive director of CBRE's Office Services team. "Enquiries are likely to further increase for new buildings as space available in existing buildings has run out. In Tokyo's 23 wards as a whole, the rise in rents should also accelerate along with the falling vacancy rate."
The Osaka all-grade vacancy rate declined by 0.1 points q-o-q to 6.3% in Q1 2015. Concerns existed around whether the vacancy rate would rise this quarter as the majority of new buildings were expected to have low occupancy upon completion. Vacancies declined however, albeit only slightly. An increasing number of companies are relocating for positive reasons, such as to improve their location or move to a higher building grade.
The Osaka Grade A vacancy rate declined by 0.9 points q-o-q to 7.2%. One new Grade A building of around 12,000 tsubo was completed in Q1 2015. The new addition had very little space left upon completion while some older buildings also saw a lot of vacant space filled. Consequently, the vacancy rate dropped sharply. Assumed achievable rents rose by 1.0% q-o-q to JPY19,500 per tsubo, marking the third consecutive quarterly increase. In the previous quarter, the fall in the Grade A vacancy rate slowed and expectations of rent increases faded somewhat. However, if vacant space continues to be filled in the coming quarters at the same pace as in Q1 2015, the balance of supply and demand could tighten and may boost overall Grade A rents.
"Tenant activity appeared to have tailed off in H2 2014 but picked up again at the start of 2015," said Takashi Katono, executive director of CBRE's Osaka branch. "The Grade A vacancy rate fell to 7.2%, finally coming to rest at the 5% mark, indicative of a tight market. If the vacancy rate continues to fall at this pace, Grade A rents could begin to dramatically rise. In the non-Grade A market, the number of medium-sized and smaller companies relocating has increased, and this segment should continue to remain healthy."
The Nagoya all-grade vacancy rate declined by 0.5 points q-o-q to 5.2% in Q1 2015. The Grade B vacancy rate in particular fell below 5.0% for the first time in 7.5 years, and is driving healthy demand for office space in Nagoya. In addition to companies taking additional space in existing offices, the period saw some firms relocating from their own older buildings. Other businesses whose existing buildings have been unable to accommodate their needs have opened separate offices in different buildings. Vacant space has therefore continued to be filled.
The Nagoya Grade A vacancy rate rose by 0.2 points to 2.8%. This was mainly due to secondary vacancies arising in buildings where tenants relocated some functions to Tokyo because they were expanding. However, with little space available, some companies have taken extra space in their existing buildings or opened small new offices. Assumed achievable rents for Grade A buildings fell by JPY50 compared to Q4 2014, to JPY21,450 per tsubo. Owners remain somewhat cautious ahead of the completion of large new buildings.
"Demand for office relocations motivated by positive factors, such as expansion or for a better location, have increased," said Takahiro Fujimoto, executive director of CBRE's Nagoya branch. "However, there is limited supply of vacant space to meet this demand, and the supply/demand balance remains tight. The completion of large buildings scheduled for this year is unlikely to greatly shift this balance."