Savills Briefing Office Sector for Q2 2018 reveals that as occupancy levels approach 100% in the majority of Tokyo's central five wards, many of the surrounding submarkets are benefiting.
Occupancy levels are approaching 100% in much of the C5W, which is benefiting surrounding submarkets and driving up average rents which registered another gain in Q2/2018.
Briefing Office Sector Q2 2018 at a glance:
*1 Tsubo = 3.306 square metres, or 35.583 square feet
"Tokyo office rents continue to rise while vacancy remains airtight. As demand fundamentals maintain their strength, these trends should persist until tertiary vacancy begins to weigh on the market." - Savills Research
Grade A Offices
The Tokyo Grade A office market strengthened further in Q2 2018, albeit at a somewhat slower pace than in the previous quarter. Grade A office rents in the C5W grew 0.8% QOQ to JPY 33,653 per tsubo per month, tracking slightly lower than the 1.3% QOQ growth posted in the first quarter.
On a YOY basis, growth in Q2 2018 was 3.9%, on par with that of Q1 2018. Vacancy continued to tighten in Q2 2018 and reached 0.7% in the C5W, a drop of 1.7ppts YOY.
New, high specification offices are continuing to see steady absorption and generally achieve high rents, though some landlords are reportedly more cautious in setting initial high rents for new buildings.
With an increasingly competitive labour market, employers are prioritising conveniently located office space in order to secure talent. In the C5W, however, availability is extremely limited for high-grade offices located near stations.
Currently, the lack of availability for prime locations in the C5W appears to be benefiting surrounding submarkets, notably Shinagawa.
Largescale Grade B Offices
The average vacancy rate for largescale Grade B office properties sat at 0.6%, continuing to reach record lows, tightening by 0.1ppts QOQ and 0.8ppts YOY. Grade B rental growth YOY has outpaced that of Grade A for the first time since Q1 2016.
The average monthly rent for largescale Grade B properties reached JPY 25,643 per tsubo, representing a QOQ gain of 1.8% and a YOY gain of 4.6%, outpacing Q1's gains of 1% QOQ and 3.4% YOY.
A lack of affordable space in the Grade A market may have bolstered tenant interest in Grade B property, although availability and new supply in the market have remained more limited.
The Grade B market also appears to be strengthening outside of the C5W.
Grade A rents and vacancy by ward
Chiyoda: Average Grade A vacancy in Chiyoda tightened 0.5ppts QOQ and 2.3ppts YOY to 0.3%. Ther average Gade A passing rents in Chiyoda stood at JPY 40,679 per tsubo, increasing by 0.6% QOQ and 2.8% YOY.
Chuo: Chuo's average Grade A vacancy rate increased 0.7ppts QOQ to sit at 2.1% in Q2. Rents strengthened 1% QOQ and 3.9% YOY. The average Grade A passing rent in Chuo now stands at JPY 31,625 per tsubo.
Minato: Average Grade A vacancy in Minato tightened 0.1ppts QOQ and 1.6ppts YOY to sit at 0.8%. Grade A rents strengthened 0.6% QOQ and 3.4% YOY to JPY 31,370 per tsubo.
Shibuya: The average Grade A vacancy rate in Shibuya sat at 0.5%, down 0.2ppts QOQ and 0.3ppts YOY. Grade A rents increased 1.3% QOQ and 4.8% YOY to JPY 34,000 per tsubo, the highest QOQ gain of the C5W, with the YOY growth falling just short of Shinjuku's.
Shinjuku: Shinjuku's Grade A vacancy rate inched up by a fraction of a percentage point but remains airtight just above 0.0%. Grade A rents moved up 0.3% QOQ and 5.0% YOY to stand at JPY 30,591 per tsubo.
Shinagawa office market takes off
As conveniently located space in the C5W is essentially unavailable, tenants have been increasingly looking outside of central Tokyo to find office space.
Shinagawa ward appears to be one of the primary beneficiaries of this trend, with its market heating up considerably in recent years. The growth rate of high-grade rents in the Shinagawa office market has outpaced that of the C5W while vacancy rates, particularly in the Grade B market, have tightened greatly over the past year.
Grade A rents in Shinagawa now stand at approximately JPY 21,000 per tsubo, gaining 4.5% YOY, exceeding the average growth rate of Chiyoda, Chuo and Minato. Grade B rental growth pushed even further, reaching 6.8% YOY and now standing around JPY 22,000 per tsubo, posting a larger increase than Grade B rents in any of the C5W submarkets.
Click here to view Savills Briefing Office Sector Q2 2018.
For more information or to discuss the report, phone or email Tetsuya Kaneko, Director Head of Research and Consultancy, Savills Japan via the contact details listed below.
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