Office Leasing

Savills Research I Tokyo Office Leasing

A ugust 23, 2010

"Tokyo’s C5W average rent and vacancy rate has continued to flatten out in the second quarter, a sign that the market is fast approaching the bottom of the current rental cycle."

Image: Shiodome Sio Site, Minato Ward, Tokyo

Offi ce leasing transactions picked up through the The C5W vacancy rate remained fl at at 6.2 per cent quarter, led by fi rms looking to consolidate regional at end-Q2. At the ward level, vacancies in Chuo, operations and secure cost savings. These included Minato and Shinjuku rose slightly over the quarter, energy company JX Holdings, who took 12,000 remained steady in Chiyoda and fell by circa 100 tsubo (almost 40,000 sqm) in Chiyoda Ward. bps in Shibuya.

Tokyo’s average central fi ve ward (C5W) rent for While the occupier market is expected to remain Grade ‘A/B’ offi ce space fell -1.7 per cent quarter- tough through 2H/2010, historically low volumes on-quarter; this compares with a drop of -5.7 per of new speculative completions are expected. A cent in Q1. The rate of rental decline is expected signifi cant rise in vacant space is therefore not to moderate further over the coming months. anticipated in the short-to-mid term.

Grade ‘A/B’ offi ce rents in Chiyoda Ward, Tokyo’s Twenty-nine offi ce investment transactions were most expensive business district, witnessed the reported in Tokyo in Q2, most in the range of JPY1 greatest change over the quarter, falling just 2 per to JPY4 billion. Of particular note, Mori Trust SOGO cent quarter-on-quarter. This follows a decline of REIT acquired a fi fty per cent stake in the Tokyo -5 per cent in Q1. Shiodome Building from its sponsor, Mori Trust.

Savills Research www.savills.com Savills Research I Tokyo Office Leasing

Tokyo Leasing Market Update

Tokyo’s office leasing market witnessed a healthy Negative growth of 1.7 per cent was recorded between level of activity in Q2/2010, refl ecting tentative signs April and June, compared with a 5.7 per cent decline of a sustained recovery in the national economy and a during the fi rst three months of the year. In fact, the gradual improvement in business sentiment. Five deals average rent fell just 70 bps and 40 bps in May and June for over 3,000 tsubo (9,917 sqm) were reported in the month-on-month respectively, supporting our view that second quarter of the year, with the most notable being rental change will level off or even return to positive JX Holdings’ agreement to occupy the entire former territory by the end of the year. Nippon Steel Head Offi ce Building in Chiyoda Ward, totalling some 12,000 tsubo (circa 40,000 sqm). The Average Rents and Vacancy for Grade ‘A/B’ Offi ce energy company will consolidate their operations from Buildings in Tokyo’s C5W, July 2009 - June 2010 several locations around Tokyo, and cited cost savings Average Monthly Rent (LHS) Vacancy Rate (RHS) JPY per tsubo as the motivating factor behind the move. Indeed, 30,000 7

most office leasing transactions involved business 6 consolidation and/or relocation to reduce property costs. 26,000 5 Nevertheless, a handful of sizable deals saw blue-chip 22,000 tenants take additional space for expansion, notably 4

3 Rakuten and Barclays Capital. 18,000

2 Notable Offi ce Leasing Transactions, Q2/2010 14,000 1 Company New Ward Former Area Type Locations Locations (tsubo/sqm) 10,000 0 June Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 J-REP Marunouchi Trust Chiyoda Ote Centre Bldg N/A Cost Source: Savills Research & Consultancy Tower North Wing saving Kellogg Co. Shingawa Grand Shinagawa Tokyo Opera City N/A Reloca- Central Tower tion Savills monitors rents and vacancy levels in over 280 Schering- Kitanomaru Square Chiyoda Shinjuku Park 1,650 tsubo/ Reloca- Plough K.K Tower 5,455 sqm tion buildings located in Tokyo’s central fi ve wards with a JX Holdings Former Nippon Chiyoda Several locations 12,000 tsubo/ Consoli- Steel HQ Bldg 39,672 sqm dation GFA of 10,000 sqm or above. Unlike similar market Fujitsu F-SAS, Musashi Kosugi Kawasaki, Maisonic 38 MT 6,894 tsubo / Consoli- information issued by other research institutions, the Fujitsu Corp. Shin Ekimae Bldg Kanagawa Bldg & other 22,792 sqm dation locations rental data provided relates to achievable rents as LAC Holdings Hirakawacho Mori Minato Shiodome City 2,100 tsubo/ Consoli- opposed to asking rents, whilst vacancy fi gures refl ect Tower Centre, Ebisu 6,943 sqm dation Prime Place current vacant space without the inclusion of ‘expected’ May Hanwa Co. Nissan Motor Bldg Chuo Shin Hanwa Bldg 2,400 tsubo/ Expan- vacancy, or that reported prior to tenants vacating Ltd Annex 7,934 sqm sion their premises. As a consequence, benchmark fi gures, Lenovo Japan Roppongi Hills Mori Minato Airport Facilites 681 tsubo / Reloca- Tower Bldg 2 2,251 sqm tion particularly vacancy rates, tend to be somewhat lower April than other market indices. Rakuten Inc. Sumitomo R&D Shinagawa N/A 6,558 tsubo/ Expan- Shinagawa Seaside 21,681 sqm sion Sumitomo Riverside M Square Chuo Several locations 3,961 tsubo/ Consoli- At the ward level, Grade ‘A/B’ offi ce rents in Chiyoda, Mitsui inc. Sumitomo 13,095 sqm dation Construction R&D Nakano Tokyo’s most expensive business district, witnessed Sakaue Barclays Roppingi Hills Mori Minato Urban Net 3,000 tsubo/ Expan- the greatest change over the quarter. Rents in the ward Capital Tower Otemachi 9,918 sqm sion fell by -2 per cent to stand at approximately JPY30,300 Maruzen Higashi Shinagawa Shinagawa Dai 2 Maruzen 1,600 tsubo/ Consoli- Bldg Bldg / Maruzen 5,290 sqm dation per tsubo. This compares with a drop of -5 per cent in Awajicho the previous quarter. Some moderation of rental decline Source: Savills Research & Consultancy was similarly experienced in the other central four wards The rate of depreciation in average Grade ‘A/B’ offi ce of Chuo, Minato, Shinjuku and Shibuya, where rental rents in Tokyo’s central fi ve wards continued to slow in change ranged between -1.9 and -1.4 per cent in Q2, as Q2/2010 as the market approaches the bottom of the opposed to -7.5 and -4.8 per cent in Q1. current rental cycle.

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I 02 Savills Research I Tokyo Office Leasing

Average Monthly Rents for Grade ‘A/B’ Office Tokyo Investment Market Update Buildings in Tokyo’s C5W, July 2009 - June 2010 Chiyoda Chuo Minato Shinjuku Shibuya According to Real Capital Analytics and other market JPY per tsubo 40,000 sources, a total of 29 ofﬁ ce buildings were transacted 35,000 in Q2/2010. Whilst most of the transactions were in the

30,000 range of JPY1 to JPY4 billion, one uniquely large deal

25,000 was reported. Mori Trust SOGO REIT agreed to acquire

20,000 50 per cent joint ownership in the Tokyo Shiodome

15,000 Building from its sponsor, Mori Trust, for JPY 110 billion. This represents the second largest J-REIT transaction 10,000 in terms of acquisition price after DA Offi ce Investment 5,000 Corporation’s purchase of the Shinjuku Maynds Tower 0 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 in Yoyogi, Shibuya Ward, for JPY134 billion in 2007. The Source: Savills Research & Consultancy Tokyo Shiodome Building comprises a 2005, B4/37F offi ce and hotel tower with a GFA of 191,394 sqm. It is The average Grade ‘A/B’ offi ce vacancy rate for Tokyo’s located approximately one minute walk from Shiodome central fi ve wards was 6 per cent at the end of June Subway Station and just six minutes walk from JR 2010, representing a fall of 20 bps from the preceding Shinbashi Station. The building is fully let to several month. The average vacancy rate over the second notable offi ce occupiers including telecoms company quarter remained fl at quarter-on-quarter at 6.2 per Softbank, and is also home to the Tokyo Conrad Hotel. cent. At the ward level, offi ce vacancy in Chuo, Minato Based on an expected NOI of JPY4.9 billion, the cap and Shinjuku rose slightly over the quarter; fi gures rate for the acquisition is 4.5 per cent. The price per sqm for Chiyoda remained fl at, while the vacancy rate for NLA equates to around JPY1,149,460 – approximately Shibuya saw a sharp fall of approximately 100 bps. 62 per cent lower than the acquisition price per sqm NLA paid in March by Mori Hills REIT for 0.7 per cent Grade ‘A/B’ Offi ce Vacancy in Tokyo’s C5W, July compartmentalized ownership in Roppongi Hills Mori 2009 - June 2010 Tower, which secured a yield of 4.1 per cent for the Chiyoda Chuo Minato Shinjuku Shibuya vendor, Mori Building. % 9

8 At the same time as the above transaction, Mori Trust 7 SOGO REIT sold its Akasaka Mitsuke MT Building to 6 Mori Trust for JPY26.9 billion. The NOI yield for the sale 5 stood at 4.7 per cent based upon actual NOI ﬁ gures as 4 of 30 September 2009. The B2/12F building comprises 3

2 17,171 sqm of ofﬁ ce space and was completed in 1975,

1 although extensive renovations were carried out in 2005.

0 The REIT originally purchased the asset from Mori Trust Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 for around the same price back in May 2006. Source: Savills Research & Consultancy

Although the occupier market is expected to remain tough through the second half of the year, the volume of new speculative ofﬁ ce completions in 2010 is expected to be at its lowest level in a decade and a signiﬁ cant rise in available space is not anticipated in the short- to mid-term.

Over 200 ofﬁ ces and associates throughout the Americas, Europe, Asia Paciﬁ c, Africa and the Middle East.

I 03 Savills Research I Tokyo Office Leasing

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