Office Demand in Tokyo to Witness Boost in 2017

Global real estate consultant CBRE expects Tokyo Grade A office rents to peak in Q3 2017 before entering a period of gradual correction. CBRE also reports companies looking to relocate have become more cautious since mid-2016 because of concerns about earnings caused by rapid appreciation of the Yen since the start of 2016. They have also been less keen to secure space ahead of the large volume of new supply scheduled for 2018 onwards. However, if the new US administration begins to implement President Trump's campaign pledges including major tax cuts and infrastructure spending, the trend for a stronger dollar and weaker Yen could intensify. This could improve expectations of earnings growth, and office demand could exceed current estimates, potentially pushing back the timing of the peak in rents. All-Grade office net absorption exceeded new supply in Q4 2016. Although tenants remained cost-conscious, companies that are planning to increase staff numbers continued to look for office space. Consequently, the All-Grade vacancy rate resumed its decline, falling 0.3 percentage points (ppt) q-o-q to 2.3%. IT companies, as well as insurance and pharmaceuticals were among the active sectors. One Grade A building was completed during the quarter, and carried some vacant space. As a result, the Grade A vacancy marked the second consecutive quarter rise, albeit slightly. Assumed achievable rents increased by 0.6% q-o-q to JPY 35,950, up 4.4% on a y-o-y basis. However, aside from the boost to average rents provided by the newly completed building, rental growth is sluggish overall. Pre-completion take-up in Grade A buildings has been slowing, and some owners are becoming more flexible on leasing terms and conditions. We reiterate our view that Tokyo Grade A office rents will peak in Q3 2017 before entering a period of gradual decline. The vacancy rate for Grade A-Minus offices declined by 0.5 ppt q-o-q to 2.0%. In areas where rents are lower, several leases were signed for vacant units of 1,000 tsubo or more. Even in new buildings with higher asking rents that still had space available, the quality of facilities and the size of floor plates were the deciding factors that helped these properties to achieve full occupancy. Grade A-Minus assumed achievable rents were flat q-o-q at JPY 24,400 per tsubo, a y-o-y increase of 2.5%. In the Grade B segment, the vacancy rate declined by 0.2 ppt q-o-q to 2.5%. A building completed in the previous quarter became almost fully let, while a large unit in an older building was let to a tenant opening a new office. Grade B assumed achievable rents rose by 0.5% q-o-q to JPY 20,800 per tsubo, a y-o-y increase of 2.5%.