COLLIERS QUARTERLY OFFICE | | RESEARCH | Q2 2019 | 19 JULY 2019

Mari Kumagai Head of Research | Osaka OSAKA: QUALITY CONTINUES TO DIVIDE +81 3 4572 1009 [email protected] THE MARKETS Osaka Office Market 2019 H1 Review and H2 Outlook

Summary & 2018–23 Q2 2019 Full Year 2019 Annual Average Recommendations > Larger pent‐up demand continues to heat up, along with the late arrival of global flexible With stable demand exceeding workspace operators in Osaka. We expect the near zero supply, we expect Demand stable demand ought to continue exceeding 42,900 sq m 80,000 sq m 112,400 sq m higher rent in the Osaka Grade A the near zero new supply. office market. Given the net new > The average annual prime office supply from supply is to track below 1.0% of 2019 to 2023 is scheduled to fall to 105,800 total stock, available options for sq m (1.0 million sq ft) on average before tenants are limited, further adjusting for demolitions. The city’s supply is 0 sq m 0 sq m 105,800 sq m reducing the vacancy in Grade A Supply set to remain below 68,000 sq m until 2022. buildings and lowering the Annual Average vacancy for all grade buildings QOQ/ YOY / Growth 2018–23 / below 2.0% until after late 2021. End Q2 End 2019 End 2023 > Average rental growth has accelerated 1.6% 3.3% 1.1% We recommend occupiers to: toward 3% with tighter market dynamics. > expand their leasing options to With little space available, rents will likely only go up until the price starts to moderate flexible workspaces Rent JPY15,904 JPY16,200 JPY16,600 with large supply starting from 2022. (USD43.7) (USD44.5) (USD45.6) We recommend landlords to: > The vacancy rate continues to hit historical 0.0pp 0.2pp 0.1pp > accelerate investments for lows, but quality continues to divide the amenities to justify rent markets. Vacancy in the Grade A buildings is to track below 0.5%, but the overall vacancy increases Vacancy 2.4% 2.2% 2.7% should edge up toward 3.0% after 2022. We recommend investors to: > Increasingly limited availability of quality > consider repurposing buildings office space ought to lift transaction volume ‐70% 11% 5% to offices given their better Total growth during 2019. We expect repurposing investment outlook than other Investment from other assets is set to increase given JPY7 billion JPY200 billion JPY240 billion asset classes Sales better investment outlook for office assets

Source: Colliers International. USD = 110 JPY using the historical average for Q2 2019. 1 sq m = 10.76 sq ft, 1 tsubo = 3.306 sq m. Note: Rent shown above is all grade, net effective rent in JPY per tsubo per month based on NFA. COLLIERS QUARTERLY OFFICE | OSAKA | RESEARCH | Q2 2019 | 19 JULY 2019

MARKET REMAINS AIRTIGHT Historical average office vacancy by grade since 2000 25.00％ Vacancy % ‐ Grade A Osaka’s rental increases continue to lag that in Tokyo, with the more Vacancy % ‐ Grade B cautious business stance prevailing among smaller business owners. A Vacancy % ‐ ALL fragmented ownership structure also means a wider variety of building 20.00％ performance by building grade. Since early 2013, the overall vacancy rates have been declining toward 3.0%. However, an increasing popularity of 15.00％ Grade A buildings does not have a large effect on Grade B buildings with their latest vacancy still tracking around 5.4%. 10.00％ The late arrival of flexible workspace operators is also pushing up demand. The overall net‐take‐up has jumped from near non‐existent to 42,900 sq 5.4％ metres (0.4 million sq feet) in Q2, beating our prior expectation that leasing 5.00％ activities will disappear along with the near zero supply until 2021. 3.0％ 1.4％ Importantly, the net new supply, after adjusting for scheduled demolitions 0.00％ averaging 37,000 sq metres (0.4 million sq feet) per annum, is to remain near zero or negative, tracking below 1.0% of existing stock over eight 2000/1 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2013/1 2014/2 2015/3 2016/4 2017/5 2018/6

consecutive years from 2013. A reduction of available office space, as 2009/10 2010/11 2011/12 demand continues to exceed such limited supply, has led to a steady rental increase of 1.1% QOQ. In 2019, our annual asking rent forecast calls for a Source: Colliers International, JREI further Grade A increase of 4.0% and a 3.3% increase for the all‐grade market. Osaka prime office: new supply, demolition and NFA change projection through 2022 (Unit: 1,000 sq m)

New Supply Demolition Net Change in Leasable Area

600.0 600.0 500.0 500.0 Average of 1.0% 400.0 of existing stock 400.0 300.0 2013 ‐ 2020 300.0 200.0 200.0 100.0 100.0 ‐ ‐ (100.0) (100.0) (200.0) (200.0) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Source: Colliers International, JREI

2 COLLIERS QUARTERLY OFFICE | OSAKA | RESEARCH | Q2 2019 | 19 JULY 2019

Office rents, vacant area, total NFA concentration by submarket Ranking by total stock : office vacancy by grade, Q2 2019 (1,000 sqm)

USD/sq m/month Rent 2020 2021 2022 Grade Grade Grade Grade Available Average Q2/2019 # Submarkets A % Total NFA A A‐ B NFA Rent 1,000 sq m Vacancy 2020 2021 2022 1Umeda 85% 1,268.9 3.5 1.4 1.3 6.2 $60.7 Q2/2019 Total 1,000 sq m 2 Honmachi 41% 708.2 ‐ ‐ 9.9 9.9 $29.1 2020 2021 2022 NFA Q2/2019 3 96% 555.8 3.0 ‐ 1.0 4.0 $54.2 4 Sakai‐suji 22% 548.4 ‐ 2.2 5.4 7.6 $32.9 Shinosaka North 5 Yodoyabashi 26% 437.3 ‐ 1.7 0.8 2.5 $58.9 Shinosaka North 6 Shin Osaka South 31% 418.1 ‐ 0.4 12.4 12.7 $26.7 57.8 ↑↑↑ Umeda 7 Dojima 62% 394.6 1.2 1.5 1.7 4.4 $44.9 60.7 ↑↑↑ 8OBP 3.5 ↓ ↓ ↓ Shinosaka South 89% 329.9 1.5 ‐ 3.5 5.1 $35.6 319.7 → → → 6.1 ↓ ↓ ↓ 9 Shin‐Osaka North 43% 319.7 2.4 0.2 0.9 3.5 $57.8 Shinosaka South 1,269 → → ↑ 10 7% 314.3 1.2 1.6 3.6 6.5 $40.7 26.7 ↑→→ 11 Tanimachi 63% 308.5 1.9 ‐ 3.8 5.7 $34.5 12.7 ↓ → → 12 Higobashi 27% 287.3 1.5 1.8 2.0 5.3 $32.0 418.1 → → → 13 Kitahama 43% 274.3 0.7 0.4 3.7 4.7 $36.0 14 47% 215.2 0.8 0.5 1.0 2.3 $38.1 15 Higashi Umeda 0% 204.5 ‐ 0.5 2.9 3.3 $48.6 16 Nishimoto‐machi 31% 163.7 ‐ 0.3 4.3 4.6 $29.8 Umeda 17 Yotsubashi 0% 162.3 ‐ ‐ 6.6 6.6 $30.3 Nakanoshima 18 Kita Umeda 39% 153.2 ‐ ‐ 0.8 0.8 $38.6 54.2 ↑↑↑ Nakanoshima 19 Nagahori‐bashi 0% 113.2 ‐ ‐ 4.3 4.3 $32.5 4.0 ↓ ↓ ↓ Total 555.8 → → ↑ Sakaisuji Source: Colliers International. Note: average rent refers to USD per sqm per month. Red refers to districts with Honmachi major vacancy increases, while Blue refers to districts with major vacancy decreases as noted by increase / Honmachi Sakaisuji decrease in available NFA. 29.1 →→↓ 32.9 →→↓ The overall market remains strong but submarket performance remains mixed. 9.9 ↓ ↓ ↓ 7.6 ↓ ↓ ↓ The city’s dominant top locations such as Umeda and Nakanoshima continue 708.2 → → → Shinsaibashi 548.4 → → → to benefit the most from rising rents and lower vacancy as more than 85% of Shinsaibashi their buildings are Grade A. Emerging business hubs around Shinosaka North 40.7 →→→ also benefit from modestly rising rents in prime buildings that offer 6.5 ↓ ↓ ↓ convenient access to the Shinkansen bullet train network. 314.0 → → → Conversely, a lack of convenient access to Osaka station, including Honmachi Concentrations of existing office buildings: and Sakaisuji, remains a challenge to attract more demand to their older and Lower Higher smaller buildings, lifting the area’s vacancy toward 7‐10%. Quality continues to divide building rents, leaving unattractive facilities in Shinosaka South with Source: Colliers International, Urban Planning Bureau – the Metropolitan Government of Osaka. modestly rising vacancy and flattish rent. We expect a rising cost differential among building grades to prompt investors to consider redevelopment in 3 Osaka, forecasting the transaction volumes up 10% over the next 18 months. Primary Authors: For further information, please contact:

Mari Kumagai Katsuji Tokita Head of Research | Osaka Management Director | Country Head | +81.3.4572.1009 +81 3 4572.8607 [email protected] [email protected]

Hazumu Iwase Executive Director | Capital Markets & Investor Services | Japan +81 3 4572.8603 [email protected]

Hideki Ota Executive Director | Capital Markets & Investor Services | Japan +81 3 4572.1005 [email protected]

Masahiro Fuse Executive Director | Valuation & Advisory | Japan +81 3 4572.8612 [email protected]

Dick Olango Senior Director | Occupier Services/ Project Management | Japan +81 3 4572.1004 [email protected]

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