Tokyo vacancy rate weathers massive supply and passes its peak
Grade A rents near turnaround at 29,900 yen/tsubo
Economic Conditions
After the japanese economy posted strong growth during the first due in part to measures that included reconstruction demand and subsidies, a countertrend has become evident as the real GDP growth rate for Q3?2012 is forecasted to decrease by 1.7 points trom the previous quarter to 1.5%. According to the Bank of Japan?s?Economic Survey of Enterprises in Japan (Tankan), the DI for large manufacturing enterprises fell 2 points from the previous quarter to -3, but the forecast DI remained?unchanged. In the near future, if the response to the European economic crisis moves ahead smoothly, demand from overseas is expected to recover, and the economy is to gradually pick up again. Apprehension remains however, over a continuation of the historically high yen exchange rate and The possible negative impact on business with China?regarding the territorial dispute over the Senkaku islands.
Demand
In Tokyo, The large new supply that came online during the previous quarter served to prime the demand. New supply at buildings in Osaka, Nagoya and Fukuoka absorbed demand, which remained firm. In Tokyo and Osaka, demand has been increasing, not just at new large buildings in favorable locations, but also at older buildings and smaller to mid-sized existing buildings.?Examples of tenants relocating die to expansion of their business has increased. Tenants nationwide continue to be amenable to relocation. As tenants enjoy what are perceived to be affordable rents, the reasons for relocations are more positive, including relocation doe to office expansion. This is despite the continued strength of relocation demand in central city locations for the purpose of consolidation and increased earthquake resistance. In Saitama, vacant space is limited in buildings with the advanced earthquake resistance, which is preferred by tenants. Demand has thus begun to spread to buildings that are somewhat older or not as well located.
New Supply/Vacancy Rates
In Tokyo, newly developed buildings and those supplied during the previous quarter have had no difficulty filling vacancies, the Grade A vacancy rate improved by 1 point from the previous quarter to 9.3% and the vacancy rate for the 23 wards of Tokyo improved by 0.4 points to 7.5%. In Osaka, although the competition of a large building with unfilled vacancies directly connected to Shin-Osaka Station brought the grade A vacancy rate up 0.8 points from the previous quarter to 11.6%, the vacancy rate for the city as a whole improved by 0.1 points. In Nagoya, where two large scale buildings were completed, the closure of a large building for redevelopment helped bring the city?s overall vacancy rate down 0.4 points to 2.7%, due in part to expansion activity within the same building. Vacancy rates fell in Fukuoka as well, as a new building was completed with high occupancy pushed by perceived affordable rents. Furthermore, relocations to expand operations and new office set ups were also observed to contribute to the decline in vacancies. In other cities, amid a trend toward restricted new supply, demand concentrated steadily at high-performance buildings in central-city locations, resulting in a near universal trend toward improved vacancy rates. The vacancy rate in Kyoto rose as tenants relocated to Osaka for the purpose of office consolidation; Takamatsu showed mixed activities with secondary vacancies emerging while active corporate movements drew in new tenants.
Rent
As business sentiment recovered, Grade A assumed achievable rents remained unchanged at 29,000 yen/tsubo in Tokyo, 18,700 yen/tsubo in Osaka (+50 yen) and 22,150 yen/tsubo in Nagoya (-50 yen), suggesting that these cities have already hit bottom. Nationwide average asking rents are trending to be flat with the exception of the three major cities where rent discounting at older buildings have slightly brought down the average asking rents.??
TOKYO
Large buildings completed during the first half absorbed much of the demand, lowering the vacancy rate
The vacancy rate among grade A buildings fell by 1 point from the previous quarter to 9.3%. A major factor behind the decline was the filling of vacancies in large buildings completed with vacancies during the first half in Shinjuku and Marunouchi, among others. The vacancy rate fell below 1% in several areas where the supply-demand balance had already been tight, such as Nihonbashi and Osaki.
Tokyo Grade A Buildings
Rent trends stable and flat
Average assumed achievable rate was unchanged from the previous quarter at 29,900 yen/tsubo. Rents remained at or near the bottom since the beginning of the year. Despite concerns that large new supply during the first half would depress rents, vacancies were filled at existing buildings, while some new buildings completed with vacancies remaining were able to fill the void without shifting strategies to lower rents. The general result was stability in rent levels with exception of some buildings seeing increased rent levels in lockstep with improving vacancy rates.
Forward-looking reasons for relocation on the rise, with rents increasing after having bottomed-out
New demand this quarter was approximately 23,000 tsubo. This represents a decrease of nearly half of the new demand in the previous quarter, which was the highest recorded since the ?Lehman Shock? financial crisis. That being said, the new demand for the past quarter was in-line with the average for the past year.
Corporate tenants have been relocating for office consolidation and other cost-cutting motives but also office building upgrades and expansions, with the latter more frequently than before. Cases were observed where building owners who had been more flexible with leasing terms took a more aggressive stance on setting rent levels due to an abundance of inquiries. Relocations among large tenants have become evident as sufficient rent adjustments have been carried out and new supply has eased. Tenants have also started to notice the affordability of rents and tight supply going forward as rental adjustments have progressed and supply has begun to ease. large scale relocations of domestic and foreign financial institutions, major manufacturers and accounting/legal firms have thus been observed. New supply this quarter was limited to a building in Roppongi, and just two buildings of approximately 28,000 tsubo are expected to be completed during the entire second half. The vacancy rate peaked in Q2 and began a decline thereafter.
Tokyo 23 Wards
Vacancy declines as it passes its peak?
For the first time in two quarters, the vacancy rate in Tokyo?s 23 wards fell in Q3 2012, decreasing 0.4 points to 7.5%. This quarter saw only approximately 26,000 tsubo of new supply coming online, compared to the 170,000 tsubo which came online in the previous quarter. The easing of the risk of an expanded supply-demand gap that could have resulted from further supply increases was a major factor. On the demand side, although the volume of demand was lower than the approximately 63,000 tsubo of the previous quarter, an expansion in demand of approximately 54,000 tsubo still had a strong impact on the vacancy rate.
In those areas which already had low vacancy rates, including Shibuya, Ebisu and Nihonbashi, even smaller and mid-sized existing buildings had little difficulty filling their vacant space, indicating that demand is reaching buildings with a broad range of attributes, particularly in these areas. Overall, the number of vacancies of 100 tsubo or less that were filled this quarter greatly exceeded the number of comparable vacancies created. This indicates that overall demand is expanding.
The trend of large relocations remain active
Meanwhile, progress continued in the filling of large contiguous vacancies, mainly at large newly constructed buildings. Improvement in the balance of supply-demand was largely contributed by those large-scale office buildings with major secondary vacancy concerns continuously securing incoming tenants. During the review quarter, there were 20 buildings at which vacancies amounting to 1,000 tsubo or more were filled (not including buildings completed this quarter) for a total of just under 50,000 tsubo (compared to just over 8,000 tsubo at seven buildings the previous quarter). In addition, tenants are being secured at an accelerating rate for large buildings scheduled for completing next fiscal year and beyond. This can be seen as an indication of highly fluid demand activity.
Rents near turnaround point
Amid these circumstances, successor tenants are being found at large buildings before concerns about the risk of secondary vacancies are realized. The speed at which space is leased is expanding, but may vary by area and building characteristics. However, the fact that expanding demand is reaching even smaller buildings in some areas can be taken to indicate that a turnaround in rents could come sooner rather than later.
OSAKA
Overall vacancy rate in Osaka falls for the 4th consecutive quarter; Grade A vacancy rises
The vacancy rate for Osaka during the third quarter of 2012 was down 0.1 points from the previous quarter to 9.9%. It was the first time in the last three years since the third quarter of 2009 in which the rate fell below 10%. The vacancy rate for Grade A buildings, meanwhile, rose 0.8 points to 11.6%. This increase was due to the completion with unfilled vacancies of Grade A building in the Shin-Osaka area.
One large building completed, tenants very active at existing buildings
A large building directly connected to Shin-Osaka Station was completed during this quarter. Although some vacancies remained, it has been absorbing demand largely from existing buildings in the surrounding area, due mainly to its highly competitive location. Looking at other activities among existing buildings in Osaka shows that vacancies left behind by tenant relocations before or during the previous quarter have grown prominent. It has also been seen, however, that large relocations for the purpose of expansion have continued to fill vacancies of several hundred tsubo of floor area. Through the previous quarter, a trend had been observed in which demand concentrated at recently constructed and favorable located buildings. During this quarter, perceived competitive rents have led to the filling of large vacancies at somewhat older buildings that have satisfactory anti-seismic capabilities. There have alsp been some cases in which firms with offices outside of Osaka have consolidated their offices within Osaka, thus increasing demand in the city. As an overall trend, there was an increase in the need for expansion activity within the same building, and expansion relocations, despite previous highly cost-conscious approaches to relocation.
High occupancy expected at large building to be completed next quarter
One large office building is expected to be completed next quarter, and it is anticipated that it will enter operation with a high rate of occupancy. In addition to existing high demand at buildings recently constructed and/or high-grade buildings, the growing trend is toward expansion of demand. The overall trend toward filling of vacancies is thus expected to continue into the near future.
NAGOYA
Nagoya vacancy rate falls for 9th consecutive quarter
Although new demand declined by approximately 5,000 tsubo this quarter, the vacancy rate decreased by 0.4 points from the previous quarter to 11.4%, particularly caused by the decrease in available stock with the Dai Nagoya Building closing for redevelopment. It was the ninth consecutive quarter in which the vacancy rate fell, While there were cases of small scale office expansion relocations, there are still scattered cases of tenants reducing floor space within their building. The main relocations observed this quarter continued to be mostly comprised of office integrations, including from suburban locations and other company-owned facilities, as well as building facilities and location upgrades implemented while controlling costs. While the vacancy rate did improve as a result, average asking rents declined by 2.0%.
Two buildings of over 5,000 tsubo completed
Nagoya Crosscourt Tower was completed in the Meieki area, as was the ORE Nishiki 20-Chrome Building in the Fushimi area. Each building brought more than 5,000 tsubo of gross floor area to the market for a total of approximately 10,000 tsubo of new supply. These new buildings were able to attract tenants by absorbing the relocation demand resulting from the closure of another building for planned reconstruction, as well as demand for office consolidation relocations. With no major injection of new supply expected through the end of 2012, the vacancy rate in Nagoya is expected to continue to gradually improve.
Vacancy rate at Grade A buildings remains low
The Grade A vacancy rate fell by 0.4 points form the previous quarter to remain low at 2.7%. Amid a continued absence of new Grade A supply, expansion activity within the same building helped fill some vacancies. However, relocations from the building to be reconstructed have already been completed and movements by large tenants are therefore expected to be few. Assumed achievable rents thus remained relatively unchanged from the previous quarter.
SAPPORO
Vacancy rate reaches the 8% level for first time in 4 years
The vacancy rate in Sapporo during the third quarter of 2012 fell by 0.7points from the previous quarter to 8.8%. It was the first time in the four years since Q3 2008 that the vacancy rate had dipped to the 8% level. During this quarter, improvements in vacancy rates could be seen in each area examined. While there were cases of rental floor space contractions and tenant exits, there has been an increasing number of cases where tenants relocated at increasing cost in order to improve the facilities and locations of their offices. The new establishment and expansion of call centers helped keep demand firm, while inquiries concentrated at more recently constructed buildings where spaces of 100 tsubo or more could be obtained, which resulted in the market filling more vacancies than the amount becoming available. However, there are concerns of demand becoming dormant with the lack of vacant space available in favorable locations such as in the central areas and around the Sapporo station North Exit that meet tenant needs. Demand is anticipated to spread towards the Nishi 11-chrome area or around the eastern end of Sosei River in order to keep demand active.
SENDAI
Vacancy rate at Sendai Station East Exit continues to rise from last quarter
The vacancy rate in Sendai during the third quarter to 2012 was 12.9%, up 0.1 points form 12.8% the previous quarter. Vacancy levels continued to increase to 18.9% in the East Exit area of Sendai station from last quarter. Major contributors to the increases in vacancy rates include cancelation of contracts by housing rented companies that increased floor space or set up additional offices immediately after the earthquake, to meet the necessary recovery measures. Contracts were seen being canceled after their tasks were completed. Other areas of the city remained unchanged with no major changes from the previous quarter. Although a prior trend toward new leases has been seen to continue, it has lost the force required to have a major influence on the market. Buildings more recently constructed or with some landmark value continued to enjoy a degree of popularity, and their differentiation from existing buildings with regard to rent continued to advance. Expectations for the near future are for an increase in demand centering largely on the construction industry as recovery work shifts from the removal and civil engineering phase into building construction.
SAITAMA
Saitama?s vacancy rate falls to the 5% level
The vacancy rate in Saitama during the third quarter of 2012 fell by 0.5 points from the previous quarter to 5.6%. While the need to open new offices in Omiya are not as significant, there have been observed cases of floor expansions within the building or relocation for the purpose of expanding in this area. Also, an influx of demand from the suburbs was observed, with many of these tenants selecting properties relatively distant from Omiya station as tenants considered the need to secure parking space and control cost increases. Cases were therefore observed in which vacancies of 100 tsubo or more were filled in buildings constructed to older earthquake standards, as well as vacancies in more recently constructed buildings and tose closer to the station, have become extremely scarce. Some landlords have been seen to consider increasing their asking rents above previous levels when new vacancies become available. With this smooth filling of vacancies, rent levels are regarded as having touched bottom, and a period of turnaround seems near.
YOKOHAMA
Despite falling vacancy rate, secondary vacancy risk is high
The vacancy rate in Yokohama during the third quarter of 2012 fell 0.2 points from the previous quarter to 10.3%. There was a lack of new supply during this quarter in a market with little to stimulate it, resulting in sluggish tenant activity. Overall, this was a period in which the secondary vacancies resulting from relocation to a succession of new buildings completed during the first half of the year became prominent. Meanwhile, some underlying support came from demand generated by relocations from suburban company-owned buildings to rental buildings. But the influx of demand from the suburbs was weak, and thought to be influenced by large vacancies in kawasaki. With large secondary vacancies expected to be realized mainly in the Minatomirai area in the near future, the expansion needs of existing tenants are expected to surface, as is an influx of demand from outside the area. Although rent levels at large buildings in the immediate vicinity of Yokohama Station have stopped falling, they remain at rock-bottom.?
KANAZAWA
Vacancy rate continues to improve in Kanazawa Station area
The vacancy rate in Kanazawa during the third quarter of 2012 fell by 0.6 points from the previous quarter to 19.0%. This is the second consecutive quarter of decrease. Although there have been few openings of new locations by tenants from other cities, within Kanazawa, a trend toward integration of group offices continues and relocations from suburbs to the vicinity of the railway station have been observed. New demand during the third quarter of 2012 was approximately 500 tsubo amod vigorous tenant relocation activity. With Hokuriku Shinkansen Line high-speed rail service scheduled to begin at Kanazawa at the end of 2014, progress is moving forward on the reconstruction of the Kanazawa Station West Exit plaza, scheduled for completion at the end of 2015. Since the vicinity of Kanazawa Station is regarded as desirable for office use, buildings in the area are making progress in filling vacancies. In the Minami-machi area, however, large vacancies remain at many buildings. Although the overall vacancy rate in Kanazawa continues to improve, areas remain differentiated by the ease or difficulty with which vacancies are being filled.
KYOTO
Corporate relocation sentiment becoming polarized
The vacancy rate in Kyoto during the third quarter of 2012 was up 0.7 points from the previous quarter to 9.1%. It was the first quarterly increase in the vacancy rate in the two years since the third quarter of 2010. While there were not as many activities observed in this quarter, there were a number of buildings that had more than 100 tsubo of vacancies realized. This was mainly impacted by tenants moving back to their company-owned buildings in order to save costs and/or due to corporate restructuring, realization of secondary vacancies after tenants relocated to newly completed buildings, and tenants exiting from short-term contracts. In addition, the consolidation to Osaka of numerous tenants occupying smaller spaces had the cumulative effect of pushing up the vacancy rate. Meanwhile, new leases and expansion activity within the same building were among trends that were expanding the overall occupied floor area in the market. It was a quarter in which trends, both expanding and shrinking demand, were intertwined. For the time being, the market is forecasted to be poor in factors stimulating either supply or demand, which is therefore expected to become sluggish as demand for expanded floor area decreases.
KOBE
Tenant attitude toward relocation begins to recover
The vacancy rate in Kobe during the third quarter of 2012 was 11.3%, a decrease of 1.6 points compared to the previous quarter. It was the third consecutive quarter of decrease, and the first time the vacancy rate reached the 11% range since the first quarter of 2009. This quarter, several trends were observed that tended to expand the occupied floor area in the rental market, including expansion activity within the same building, relocation from suburbs to city-center locations and relocation to rental buildings after the sale of company-owned buildings. All buildings in which vacancies of 200 or more tsubo were filled had been built since the new earthquake resistance standards took effect, indicating the desire for seismic safety performance. Relocations tending to increase costs have been limited for some time, but the increase in demand activity can be said to indicate a trend toward recovery in business sentiment. Although lack of factors stimulating demand is expected to continue, die to reduced supply, relocations from suburbs to central city locations and from company-owned buildings to rental office buildings are expected to generate an influx of demand that may improve the market overall.
HIROSHIMA
Business activity leading to increased occupancy stands out
The vacancy rate in Hiroshima during the third quarter of 2012 was down 0.6 points from the previous quarter to 11.4%, the fourth consecutive quarter of declining vacancy. It was also the first time in the last three and a half years that the vacancy rate reached the 11% range. Several trends were observed that tended to expand the occupied floor area in the rental market, including expansion activity within the same building and relocation from suburbs to city-center locations. Small and large companies entering into new leases were apparent. Strong business performance encouraging a recovery in business sentiment ant progress in rent adjustments throughout the market are thought to have been related to proactive location strategies among tenant firms. Amid this kind of strong office demand from corporate tenants, vacancies at new prime buildings have become scarce. The key to whether the vacancy rate in the Hiroshima market can improve is the degree to which demand can be stimulated at buildings over 20 years old.
?TAKAMATSU
Robust relocation activity; prominent secondary vacancies boost vacancy rate
The vacancy rate in Takamatsu during the third quarter of 2012 was 18.0%, an increase of 0.6 points from the previous quarter. This is the second consecutive quarter of increasing vacancy rates. large contiguous secondary vacancies of over 100 tsubo became prominent as financial institutions relocated to a new commercial complex. This had a major impact on the vacancy rate, as did contraction activity within the same building and other moves involving relatively small amounts of floor area in the tens of tsubo. Nevertheless, ?smaller vacancies were widespread and affected the full range of industries and buildings. Meanwhile, new office openings and small-scale expansions within the same building leading to increased demand was observed. The overall effect was of a mixed market with both an influx and outflow of demand. With no new supply scheduled in the near future, the supply-demand balance is expected to continue its mixed progress and retreat.
FUKUOKA
New building begins operation at high occupancy in Hakata Station area
The vacancy rate in Fukuoka during the third quarter of 2012 was 11.2%, a decrease of 0.6 points from the previous quarter and the fourth consecutive quarter of declining vacancy rates. A newly constructed building on the preriphery of Hakata station opened with high occupancy. With vacancies scarce at recently constructed prime buildings, the availability of large contiguous space and perceived affordable rent levels were highly valued by tenants, and most of the absorbed demand came from relocations from nearby buildings. I existing buildings as well, new leases and expansion relocations, as well as relocations from suburbs to the city center were among the numerous observed cases of activity tending to expand the occupied floor area in the market. This was true in both new and existing buildings. The result was on overall decline in the vacancy rate for Fukuoka. Going forward, no plans for large new building construction have come to light. The need among tenants for newly constructed prime buildings has long been abundant, but the lack of available supply could drive demand under the surface, resulting in sluggish market growth.
MARKET OUTLOOK
Nationwide?Trend toward improved vacancies continues; rent levels flat for now
As corporate sentiment towards relocation continues to hold strong following the previous quarter, there were scattered activities of building grade up or scale up relocations that leads to market expansion. Although Japan-China relations remain a risk factor for now, domestic demand is expected to gradually recover in the near future. Vacancies are anticipated to continue improving going forward, backed by proactive relocations from the strong corporate earnings. However, rents are thought to remain flat for the time being as the rental burdens a tenant can absorb have not recovered by those companies thinking the relocation opportunity is now with the adjusted rents.
Tokyo?Large relocations increase broadly; Grade A rents enter recover mode
With new supply in Tokyo forecasted to ease, the vacancy rate is expected to improve steadily amid the expanding scope of demand. Grade A rents are showing signs of a turnaround, and will probably increase by year-end. With tenants being found for the secondary vacancies in Tokyo?s 23 wards overall, a genuine improvement in the supply-demand balance is expected in the coming quarter amid active inquiries. Rent levels are therefore expected to turn around earlier in 2013 than previously expected, from mid-year to fall. Grade A rent levels can be expected to increase by several percent one year from now, assuming steady economic growth and the spread of aggressive relocation moves into a broad range of industries.
Osake?Demand expands; Grade A rents bottom out
With a new building expected to begin operation at a higher level of occupancy next quarter, expansion relocations and other demand-expanding moves are expected to increase in Osaka. In fact, in addition to increasing demand at well-located and high-grade buildings, perceived affordable rent levels at older buildings with satisfactory anti-seismic capabilities are attracting demand, and vacancies are expected to fill with little difficulty throughout the market in the near future. While Grade A rents are thought to have hit bottom, as rents slightly rose this quarter, it may take some time before there is upward pressure on rents are large supply is expected to spring in 2013. However, with the large supply set to prime the pump for increase in demand going forward, rents can be anticipated to turn upward in mid-2013 if the effects of secondary vacancies remain mild.
VACANCY RATE & AVERAGE ASKING RENT COMPARISON
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Tokyo Apartments For Sale | Tokyo Apartments For Rent | Real Estate Japan
Source: http://www.realestate.co.jp/2012/10/29/offices-in-japan-market-review/
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