Takashi Katono, executive director of CBRE's Advisory & Transaction Services (Office) speaks to WILLIAMS MEDIA about CBRE's Q4 2018 Japan Office MarketView report.

Report Highlights for Major Cities

• Tokyo Grade A vacancy rate fell 0.2 points q-o-q to 0.7%; vacancy rate is now below 1% across all grades 
• Osaka Grade A vacancy rate rose 0.1 point q-o-q to 1.0%; All-Grade vacancy rate stands at record low of 1.7% 
• Nagoya Grade A vacancy rate fell 0.1 point q-o-q to 0.5%, a record low 

CBRE Rent Forecasts (Q4 2018 – Q4 2019) 

• Tokyo Grade A rents: Forecast to increase by 0.3% over the next year 
• Osaka Grade A rents: Forecast to increase by 4.1% over the next year 
• Nagoya Grade A rents: Forecast to increase by 2.4% over the next year 

Tokyo 23 Wards

Newly constructed buildings continued to see high levels of occupancy in 2018, while existing buildings also saw spaces being filled. Net absorption for the year was 300,000 tsubo, exceeding new supply of 250,000 tsubo, the third highest level since CBRE's surveys began recording this figure in 1992. As a result, the vacancy rate dropped below 1% across all grades in Q4 2018, with the All-Grade vacancy rate at 0.8%, a survey record low. All buildings completed this quarter were almost fully occupied, regardless of grade. Even at existing buildings with units available for lease, space continued to be filled as tenants took additional space within their existing building or landlords subdivided units. There continued to be solid demand from coworking operators, with occupiers in this category securing more than 5,000 tsubo of space across several buildings during the quarter. 

All-Grade rents stood at JPY 22,210. This 2.0% q-o-q increase was mainly driven by Grade B buildings and other small-to-medium sized properties. Grade A rents rose by 0.9% q-o-q which was slightly lower than in the previous quarter (+1.4%). 

Large buildings scheduled for completion in 2019 are expected to fill up their spaces with tenants that will be relocating from other existing buildings. With the risk of an economic downturn growing, it may take longer for these existing buildings to find replacement tenants. Grade A rents are expected to rise by 0.3% this year but are then expected to decline by around 4% in 2020. 

Takashi Katono, executive director of CBRE's Advisory & Transaction Services (Office), commented: “Demand from tenants seeking to consolidate offices or improve their office environment remains solid. Limited availability in existing buildings is prompting many tenants to focus on the new supply of around 500,000 tsubo scheduled for completion over the next two years. The pre-lease ratio is currently 80% for buildings scheduled for completion in 2019, and 30% for buildings scheduled for completion in 2020. However, as many tenants in these new buildings will relocate from existing properties, there is concern that vacancy could arise in those existing buildings, depending on economic performance.” 

Osaka

The Osaka All-Grade vacancy rate stood at 1.7% in Q4 2018, the lowest level since CBRE's survey began recording this figure in 1993. The severe shortage of space is insufficient to meet robust demand from tenants seeking to establish new offices or relocate to a larger premise. All-Grade rents rose by 2.1% q-o-q to JPY 12,690 per tsubo, mainly driven by rents for offices which are below Grade B.

The Grade A vacancy rate increased by 0.1 point q-o-q to 1.0%. There was very little available space for tenants in existing buildings. Grade A rents rose by 0.8% q-o-q to JPY 23,850 per tsubo. As an increasing number of tenants are seeking space in Grade B or lower buildings, there has also been a marked rise in rents for non-Grade A properties. Grade A rents are expected to increase by a further 4.1% over the next year.

Hideo Oue, senior director of CBRE's Advisory & Transaction Services (Office), Kansai office, commented: “There is robust demand for office space, even in low-grade buildings. Tenants are increasingly aware that they need to secure space now, as availability is shrinking rapidly.”

Nagoya

The Nagoya All-Grade vacancy rate decreased by 0.2 points q-o-q to 1.1% in Q4 2018. This marked the third consecutive quarterly decline, with vacancy now standing at the lowest level since the survey began recording this figure in Q4 1993. The limited remaining space in Grade A buildings was filled this quarter, a move that led to the vacancy rate falling by 0.1 point q-o-q to a record low of 0.5%. In the Grade B market, space in several buildings was occupied as tenants moved away from the suburbs to improve their location or establish new offices. As a result, the Grade B vacancy rate fell below 1%, a survey first. 

All-Grade rents rose by 0.8% q-o-q to JPY 12,720 per tsubo, while Grade A rents rose by 2.7% q-o-q to JPY 26,450 per tsubo. Grade A rents are now approaching the record high of JPY 27,350 per tsubo set in Q4 2007. No new large properties are scheduled for completion until May 2020, meaning that Nagoya will remain a tenant’s market. CBRE expects rents to rise by 2.4% over the next year. 
Junichi Miyazaki, director of CBRE's Advisory & Transaction Services (Office), Nagoya office, commented: “The pre-lease ratio for medium-sized buildings scheduled for completion in 2019 is already estimated to be over 90%. Relocation options for tenants are dwindling rapidly.” 

Highlights for Regional Cities

• Sendai: Vacancy rate at lowest level for fifth quarter running, tenants intensify search for space
• Yokohama: Whole-building lease finalized for property due for completion in 2020 
• Fukuoka: Vacancy rate at record low for the second quarter running, rents at record high 

In Q4 2018, out of the 10 regional cities surveyed by CBRE, the vacancy rate fell in six and was flat in one. 

Available space became even more scarce as tenants relocated, established new offices, or expanded their floor space within their existing building. In Sendai, several companies intensified efforts to secure space, with the vacancy rate hitting a new low for the fifth consecutive quarter. In Yokohama, with few units available even in large buildings, a leading manufacturer decided to take up the entire space of a property due for completion in 2020. In Kanazawa, the vacancy rate fell for the second quarter running as several tenants relocated to improve their location and establish new offices. Hiroshima saw strong relocation demand from tenants looking to improve their office environment. Large buildings scheduled for completion in Q1 2019 are expected to launch with high levels of occupancy. 

Assumed achievable rents rose in all 10 cities for the fourth consecutive quarter. With supply still tight, rents in many cities remain at record highs. In Fukuoka, assumed achievable rents rose by 2.2% q-o-q, and by 11.5% over full-year 2018, the strongest rate of growth among the 10 cities surveyed. Rents hit record highs in Sapporo, where there is a chronic shortage of space for tenants looking to relocate, and in Saitama and Kyoto. In Sendai, rental growth exceeded 1% for the fourth consecutive quarter. 

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