Japanese Property Market Quarterly Review, First Quarter 2016 -Office Rents Rise Again, Foreign Visitor Arrivals Boost Hotels and Land Prices-

3.Sub-sectors

1) Office
The rent index of Tokyo grade-A¹ offices rose by 3.4% q-o-q and 9.1% y-o-y to 33,995 JPY per month per tsubo in the first quarter (Chart-9). Though constrained by large new supply in the fourth quarter, the increasing trend of office rents in Tokyo since 2012 still looks alive.
The vacancy rates of Tokyo grade-A offices remained unchanged at 3.3% in the first quarter, however, finding a tenant seems to have become time-consuming at the current high rents.
The rent index of Tokyo grade-B² offices also rose by 9.4% q-o-q to 19,971 JPY per month per tsubo and the vacancy rates improved to 3.0% for the fifth consecutive quarter (Chart-10). Office markets have been improving nationwide as vacancy rates in major local cities excluding Sendai continued to decrease (Chart-11).

Chart-9 Tokyo Grade-A Office Market/Chart-10 Tokyo Grade-B Office Market/Chart-11 Office Vacancy Rates

¹ Higher-spec buildings within the very large sized category of the Sanko Estate Grade-A-Office Guidelines, urban area five wards of Tokyo, main office areas and other specially integrated areas, with total floor areas of more than 33,000 m², main floor sizes of more than 990 m², building age of 15 years or less (including some well-refurbished older buildings), facilities with ceiling heights of 2.7m or more, individual air-conditioning, earthquake resistance and environmental friendliness.
² Buildings with main floor sizes of more than 660 m²excluding Grade-A.

2) Residential Rental
Residential rents in the five major wards of Tokyo have apparently stopped rising excluding Shibuya ward in 2016, terminating the rising trend since 2012 (Chart-12).
Vacancy rates of Tokyo luxury apartments decreased to 6.27% in the first quarter (Chart-13). The current rents at 15,601 JPY per tsubo per month is lower than those at 17,850 JPY in the first quarter 2008 when vacancy rates were at the same level. The current lower rents should be attributed to the smaller number of high-salaried expats.

Chart-12 Tokyo Residential Rent Index/Chart-13 Tokyo Luxury Residential Market

3) Retail, Hotel and Logistics
Same store sales of department stores, supermarkets and convenience stores remained stable shrinking somewhat y-o-y in March (Chart-14).
Prime retail rents in Tokyo Ginza dropped in the second half of 2015 though the rents still remained much lower than those of the previous peak in 2008.
Prime retail rents in other major local cities such as Shinsaibashi, Osaka and Tenjin, Fukuoka have been rising.

Chart-14 Retail Same Store Sales/Chart-15 Prime Retail Rents (Ground Floor)

Foreign visitor arrivals in the past twelve months have reached 20 million people since January (Chart-16). The pace of increase accelerated in 2015 boosted by the JPY depreciation. Thanks to this trend, hotels have maintained high occupancy rates. Hotel occupancy rates in 61 cities nationwide improved by 0.7% y-o-y to 82.6% in March (Chart-17). Acquisitions of existing hotels and development of new hotels have both increased and transaction prices for hotels have been rising. The number and floor area of construction starts for hotels and ryokans increased by 34% and 40% y-o-y respectively in 2015, albeit still smaller than those from 2005 to 2008 (Chart-18).

Chart-16 Hotel Occupancy Rates/Chart-17 Foreign Visitor Arrivals in Past 12 Months/Chart-18 Number and Floor Area of Construction Starts for Hotels and Ryokans

According to CBRE, the vacancy rates of large logistics facilities designed for multiple tenants in the Tokyo metropolitan area increased by 1.4% q-o-q to 8.3%, the highest since the fourth quarter of 2010 (Chart-19). New supply as large as 120 thousand tsubo overwhelmed healthy demand for large facilities, while vacancy rates of logistics facilities completed more than a year ago remained at 1.7%. The vacancy rates may increase further based on the continuous new supply as large as 130 thousand tsubo and 90 thousand tsubo expected in the second and the third quarter respectively.
The vacancy rates of large logistics facilities designed for multiple tenants in the Osaka metropolitan area decreased by 0.1% q-o-q to 3.4%. The vacancy rates will certainly increase in the second half, pressed by the largest ever 80 thousand tsubo of new supply expected in the third quarter.
Constrained by the massive supply, the average logistics rent should be lower in both the Tokyo and Osaka metropolitan areas. However, logistics rents have been rising and are expected to remain stable in specific areas where new facilities are rare and multiple consumer markets are accessible such as in areas along the Outer Ring Road and Kyoto.

Chart-19 Logistics Facility Rents and Vacancy Rates (Large Sized Multi-Tenant-Use)

Japanese Property Market Quarterly Review, First Quarter 2016 -Office Rents Rise Again, Foreign Visitor Arrivals Boost Hotels and Land Prices-

3.Sub-sectors

Eriko Kato