Savills World Research

Briefing Office sector Q4 2017

Image: Office landscape in central Tokyo SUMMARY Take-up is maintaining strong momentum. Average rents in the C5W registered another gain in Q4/2017 and vacancy is extremely tight, encouraging strong pre-leasing activity.

 New offices continue to attract  The average Grade A office tenants in the central five wards (C5W), vacancy rate in the C5W held steady “Tokyo offices had another tightening both Grade A and Grade B at 1.2%, representing a tightening of vacancy to the lowest level since we 0.5 percentage points (ppts) QoQ and strong quarter of rental growth started our survey. 0.7ppts YoY. reflecting extremely tight  Pre-leasing activity is proceeding  Average passing rents for large- at a robust pace, indicating strong vacancy. Given strong pre- underlying demand growth. scale Grade B office space rose to JPY24,953 per tsubo, climbing by leasing activity and positive  Average passing rents for Grade A 1.0% QoQ and 3.3% YoY. economic conditions, rental office space in the C5W strengthened to JPY32,974 per tsubo1 per month,  The average vacancy rate for growth should continue representing a 1.1% rise quarter-on- large-scale Grade B office properties towards late 2018 or even quarter (QoQ) and a 4.0% increase remained extremely tight at 0.9%, year-on-year (YoY). tightening by 0.1ppts QoQ and 1.2ppts longer.” Savills Research 1 1 tsubo = 3.306 sq m or 35.583 sq ft Yo Y. savills.co.jp/research 01 Briefing |Tokyo office sector Q4 2017

Grade A offices GRAPH 1 The Tokyo Grade A office market Office rents and vacancy in Tokyo’s C5W*, 2011– continued to show robust Q4/2017 fundamentals throughout Q4/2017. Average Grade A vacancy Average Grade B vacancy New, high-specification offices Average Grade A rent Average Grade B rent 35,000 14% are seeing steady absorption and

achieving high rents. Strong pre- 30,000 12% leasing activity bodes well for 2018. Companies are competing to secure 25,000 10% attractive office space in order to Vacancy rate 20,000 8% attract talent, due to the tightness of Japan’s labour market. Although 15,000 6% there is risk of secondary vacancy, Rent (JPY/ tsubo) strong demand growth appears to 10,000 4% be sustaining market momentum at 5,000 2% this point. Tokyo’s vacancy continued to tighten in Q4/2017 and reached 0 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1.2%, an improvement of 0.7ppts 2011 2012 2013 2014 2015 2016 2017 YoY. Source: Savills Research & Consultancy * Chiyoda, Chuo, Minato, , and . Grade A office rents strengthened 1.1% QoQ to JPY32,974 per tsubo GRAPH 2 per month. Rents grew 4.0% in Grade A office rental index by ward, 2011–Q4/2017 2017 despite concerns at the beginning of the year, comfortably Chiyoda Chuo Minato Shinjuku Shibuya Average exceeding our original expectations. 160 Strong economic conditions and rising corporate profits seem to 150 be translating into positive office 140 performance.

130 Large-scale Grade B offices 120

The average vacancy rate for large- 100 = Q1/2012 scale Grade B office21properties sat 110

at 0.9%, the lowest level since our 100 survey started, further tightening by 0.1ppts QoQ and 1.2ppts YoY. 90 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Vacancy remains tight due to the 2011 2012 2013 2014 2015 2016 2017 grade’s wide demand base, driven by its affordability and limited upcoming Source: Savills Research & Consultancy supply. GRAPH 3 Grade B rental growth is generally Grade A office vacancy by ward, Q3/2016–Q4/2017 continuing at a similar pace to that of Grade A. The average monthly rent Q3/2016 Q4/2016 Q1/2017 Q2/2017 Q3/2017 Q4/2017 for large-scale Grade B properties 10% was JPY24,953 per tsubo in Q4. This 9% represents a QoQ gain of 1.0% and a YoY gain of 3.3%. 8% 7%

Grade A rents and 6% vacancy rates by ward 5% Chiyoda The average Grade A vacancy 4% rate in Chiyoda was 1.5% in Q4, 3%

representing a tightening of 0.6ppts 2% QoQ but a softening of 0.5ppts YoY. 1% The average Grade A passing rent 0% 2 “Large-scale Grade B office” refers to buildings Chiyoda Chuo Minato Shinjuku Shibuya with a GFA of 4,500 tsubo (15,000 sq m) and a building age of less than 25 years. Some buildings are included that do not fit this definition. Source: Savills Research & Consultancy

savills.co.jp/research 02 Briefing |Tokyo office sector Q4 2017

in Chiyoda stood at JPY40,009 per TABLE 1 tsubo, increasing by 0.8% QoQ and Major tenant relocations, Q4/2017 2.3% YoY. Origin Anderson Mori & Tomotsune plans Chiyoda Chuo Minato Shibuya Shinjuku Other to move from Akasaka K-Tower to the Otemachi Park Building. 8 5 11 3 0 10 Destination The law firm is expected to lease over 3,000 tsubo. Mitsubishi Real 6 2 2 10 Chiyoda Estate Services plans to move its headquarters from the Shin- 2 2 1 5 Chuo Otemachi Building to Otemachi 1 1 8 2 3 15 Minato Financial City Grand Cube in May 2018, leasing about 1,300 tsubo. 1 1 2 Shibuya Mitsubishi Materials is likely to 1 1 Shinjuku move from Keidanren Kaikan to the Nijubashi Building, which 1 1 2 4 Other is slated for completion in October 2018. Source: Nikkei RE, Savills Research & Consultancy

Chuo the building afterwards. Transaction Tower to the Sumitomo Fudosan Chuo’s average Grade A vacancy Media Networks and Mitsuuroko -Juban Building and will rate tightened 1.0ppts QoQ to Green Energy both plan to move to lease about 630 tsubo. FinTech sit at 2.9% in Q4. Rents in Chuo the Taiyo Seimei Building. Global will relocate its headquarters strengthened 0.8% QoQ and 4.8% from Toranomon Towers Office to YoY. The average Grade A passing The project is slated for completion rent in Chuo stood at JPY30,926 per in January 2018. Central Square in January tsubo. 2018. The company will consolidate Minato its operations with FGI Capital Recruit Marketing Partners will Average Grade A vacancy in Minato Partners, whose headquarters are relocate from Kyobashi Trust Tower tightened 0.1ppts QoQ and 1.2ppts currently located in Executive Tower to Oak Meguro, leasing 1,557 tsubo. YoY to sit at 1.1%. Grade A rents Toranomon. Remixpoint will relocate J. Front Retailing will relocate its strengthened 0.9% QoQ and 2.9% from the KDX Nakameguro Building headquarters to the Nihonbashi YoY to JPY30,930 per tsubo. to Sumitomo Fudosan 1-Chome Mitsui Building in January Newly-completed buildings are Grand Tower for expansion and 2018. The Yanmar , attracting new tenants. In January security enhancement. where J. Front Retailing is located, 2018, Funplex, a subsidiary of will undergo reconstruction and it is online game operator Gree, plans Shibuya unclear if the company will return to to move from Mori The average Grade A vacancy rate

TABLE 2 Notable office leasing transactions, Q4/2017

Approximate space Company Business sector Type Former/current location New location tsubo sq m

Roppongi Hills Mori Tower Google IT HQ relocation 14,000 46,200 Minato-ku Shibuya-ku East Various Tower Mixi IT HQ relocation 7,000 23,100 Shibuya-ku Shibuya-ku

Akasaka K-Tower Otemachi Park Building Anderson Mori & 3,500- 11,600- Law firm HQ relocation Tomotsune 4,000 13,200 Minato-ku Chiyoda-ku

Various Tokyodo Chiyoda Building Japan Information IT HQ relocation 3,600 11,900 Processing Koto-ku Chiyoda-ku

Various Jingumae Tower Building Universal Music Music HQ relocation 1,800 6,000 Minato-ku Shibuya-ku

Source: Nikkei RE, Savills Research & Consultancy

savills.co.jp/research 03 Briefing |Tokyo office sector Q4 2017

MAP 1 Average rents per tsubo in selected submarkets, Q4/2017

Chiyoda ¥30.1 Shibuya Minato ¥30.0 Meguro

¥45.1

¥34.1¥34.1 ¥23.8

¥32.6 ¥32.3

¥27.1¥27.1 ¥34.2

Grade A buildings, average passing rent + CAM per tsubo in thousand JPY. Coloured areas for illustrative purposes only. Source: Savills Research & Consultancy in Shibuya sat at 0.5%, flat QoQ but and 6.0% YoY to reach JPY29,773 to be going smoothly, and the 1.1ppts down YoY. Grade A rents per tsubo. In addition to Shinjuku’s gradual growth is likely to continue. increased 2.0% QoQ and 4.9% YoY extremely tight occupancy, rents That being said, some submarkets to JPY33,233 per tsubo. lower than other wards make it easier may see a large influx of availability. for landlords to secure increases. Impending vacancies from moves The biggest move announced in scheduled in 2019 could precipitate Q4 was Google’s relocation from Pharmaceutical company SSP some softness in the market in Roppongi Hills Mori Tower to will relocate its headquarters from 2018. The market could exceed our Shibuya Stream, which is slated the SSP Headquarters Building in expectations and excel for another for completion in 2018. This will Chuo to Tokyo Opera City Tower year, but it is too early to make that be a remarkable return to Shibuya in Nishi-Shinjuku in December. judgement and we need to look out following the company’s decision to The move came after Sanofi, for signs of changing trends.  leave for Roppongi whose headquarters are located in 2010. Google plans to lease the in Tokyo Opera City, became a building’s 14,000-tsubo office portion new parent company of SSP in in its entirety, securing enough space January. Shinkawa, a semiconductor to double its current headcount. Mixi equipment manufacturer, relocated announced its plan to relocate its from its own building in Musashi- headquarters to Shibuya Scramble Murayama City to Shinjuku Front Square East Tower in 2019. Tower in December. The company is Reportedly, the company may lease expected to lease about 170 tsubo. as much as 7,000 tsubo to secure enough space for future expansion. The company currently occupies Pre-leasing is strong, Sumitomo Fudosan Shibuya First but close monitoring Tower. needed 2017 was an unexpectedly strong Shinjuku year for the Japanese office market. Shinjuku’s Grade A vacancy rate High demand kept vacancy tight tightened 0.4ppts QoQ and 0.5ppts and supported further rental growth, YoY to 0.2%. Grade A rents in despite a glut of upcoming supply. Shinjuku climbed by 1.1% QoQ Pre-leasing activity for 2018 appears

savills.co.jp/research 04 Briefing |Tokyo office sector Q4 2017

OUTLOOK The prospects for the market

Tokyo Grade A and Grade reflecting strong demand for high- market might soften due to secondary B offices continued to show specification office spaces. The labour vacancy expectations in 2019. Some resilience in Q4/2017. Despite market remains tight, motivating submarkets may be particularly temporary softness early in the companies to secure attractive affected by large new supply and year, strengthening demand office space to draw talent. Positive availability. We will closely monitor any steadily filled vacancy in newly- economic trends, including a long change in the market climate. opened offices. Rents climbed for string of consecutive quarterly GDP another quarter, ending 2017 with growth and increasing corporate over 4.0% YoY growth. This is profits, are likely to maintain this higher than growth in 2016. momentum.

Pre-leasing activity for 2018 Having said that, it is too early to appears to be going smoothly, predict market direction in 2018. The

Savills monitors rents and vacancy levels at more than 450 buildings located in Tokyo’s central five wards with a GFA of 3,000 tsubo (10,000 sq m) or above. Unlike similar market information issued by other research institutions, the rental data provided relates to estimated passing rents, inclusive of common area management fees, as opposed to asking rents. Meanwhile, vacancy figures reflect current vacant space without the inclusion of ‘expected’ vacancy, or that reported prior to tenants vacating their premises. As a result, benchmark figures, particularly vacancy rates, tend to be lower than other market indices.

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