TENANTS TURN MORE ACTIVE AHEAD OF FISCAL YEAR-END

All-Grade office net absorption in Tokyo surged to 75,100 tsubo in Q4 2015 compared to new supply of 33,800 tsubo. The vacancy rate consequently fell by 0.6 points q-o-q to 3.0%, the twelfth consecutive quarterly decrease. Net absorption for 2015 as a whole was 220,000 tsubo, around 40,000 tsubo higher than the 180,000 tsubo average recorded over the past ten years.

One reason for the large take-up this quarter is partly due to seasonality, as some companies tend to aim to move at the end of the fiscal year in March. With vacant space gradually dwindling, especially in new buildings, an increasing number of companies that had been unable to decide where to move, finally signed leases. This trend was seen in a wide variety of companies. In the Marunouchi/Otemachi area, the vacancy rate rose 1.5 points to 2.4%, as a new building was completed with space still available. However, vacancy rates declined in all other areas and the tight balance of supply and demandbecame more widespread.

TOKYO GRADE A

VACANCY RATE FALLS BELOW 4.0% FOR FIRST TIME SINCE Q3 2008.

In Q4 2015 large spaces were let in new buildings that still had space available. The Tokyo Grade A office vacancy rate declined by 1.2 points q-o-q to 3.3%. Net absorption in 2015 as a whole fell by around 10% y-o-y to 117,300 tsubo, but this was above the ten-year average of 79,000 tsubo. In the Yaesu/Nihonbashi area, a significant volume of vacant space was let in a new building to accommodate demand from a tenant relocating during the rebuilding of its head office. In the Toranomon/Shiodome area, vacant space was filled in existing buildings by companies aiming to upgrade their location. In the arunouchi/Otemachi area, the vacancy rate rose 3.0 points to 3.2% as a new building was completed with space still available. However, it is unlikely that it will take long to let the space available in this building, as tenants have accelerated their decision making ahead of the fiscal year-end in March. Grade A assumed achievable rents rose by 1.8% q-o-q to JPY 34,450 per tsubo in Q4 2015. In the previous quarter, increases seemed to be subdued, at +0.7%, but they have picked up again, mainly in buildings in the areas where occupancy has improved.

TOKYO GRADE A-MINUS NEW SUPPLY FULLY LET UPON COMPLETION AS GROUP COMPANIES MOVE TO A SINGLE LOCATION

This quarter saw no shortage of enquiries for large spaces in Grade A-Minus buildings. Despite new supply of 15,600 tsubo, the largest since Q3 2014, the vacancy rate in Q4 2015 declined by 0.2
points q-o-q to 2.6%. Of the new buildings completed in Q4 2015, those located in the Shinagawa/Tamachi and other surrounding areas were fully let due to several cases of space consolidations. Some existing buildings managed to let comparatively large amounts of vacant space in this quarter alone by lowering rents slightly, but demand is strong for Grade A-Minus offices overall. Tenants signing new leases included companies with head offices in suburban areas relocating some departments to larger offices in central Tokyo.

TOKYO GRADE B

SPACE LET IN NEW BUILDINGS; VACANCY RATE FALLS TO 3.2%

There was new Grade B supply for the first time in three quarters. However, net absorption surged from 1,300 tsubo in Q3 2015 to 12,700 tsubo, and the vacancy rate fell by 0.7 points q-o-q to 3.2%. One new building was completed in the Yaesu/ Nihonbashi area during the quarter. Although it was completed without being fully let, it is attracting plenty of enquiries as it provides much sought after space close to Tokyo Station. It is therefore not expected to take long for it to be fully let. Meanwhile, a number of buildings completed in Q3 2015 or earlier that still had space available managed to let a lot of space by lowering rents to market levels.

(CBRE Research)

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