COLLIERS QUARTERLY OFFICE | TOKYO | RESEARCH | Q1 2020 | 15 APRIL 2020 Mari Kumagai Head of Research | Tokyo FOCUS ON QUALITY BEYOND 2020 +81 3 4572 1009 Tokyo Office Market 2020 Q1 Review and Outlook [email protected] Insights & 2020–24 Recommendations Q1 2020 Full Year 2020 Annual Average A large proportion of supply through mid-2021 We expect a delayed market has already been absorbed through pre- downturn from late 2020 commitments. We expect any fall in demand followed by prolonged recovery Demand from the pandemic to appear first in lower 383,740 sq m 316,000 sq m 492,000 sq m from 2021. For 2020, Tokyo still grade buildings from Q2 2020 onwards. should see positive net absorption despite a demand shock slightly This year’s new supply is almost double that of larger than the Global Financial 2019. Some projects should see delivery delays Crisis (GFC). Landlords are now due to labor shortages as a result of business disruptions from COVID-19. 215,200 sq m 918,800 sq m 508,000 sq m better positioned, having built a Supply better buffer of high pre- Annual Average commitments, tracking above QOQ/ YOY / Growth 2019–24 / 92% for 2020 and 52% for2021. End Q1 End 2020 End 2024 We recommend occupiers: In Q1 2020, the high pre-commitment rate by 0.3% -0.8% 0.0% > Plan lease renewals ahead of a well-established large occupiers has supported recovery to realize immediate rents. Undistinguished buildings are starting to face pricing pressure; however, this is near- rental saving. Rent JPY 39,900 JPY 39,100 JPY 39,800 absent for wellness-certified buildings. We recommend landlords: > Prepare for a rental shortfall We expect vacancy to begin a modest increase 0.0pp 0.5 pp 0.1pp from tenants in affected from Q3 2020 towards our year-end forecast of -1.8% industries. a still-low 3.0%. We recommend investors: Vacancy 1.0% 1.5% 2.7% > Focus on quality assets (Grade Cap rates are widening reflecting a rising risk 0.0pp 0.2 pp 0.0pp A or wellness certified) with a premium on credit, liquidity and operational stable tenant profile as risk Cap issues. More investors are staying on the premiums will remain Rate sidelines with Q1 2020 transaction volumes 3.5% 3.7% 3.6% elevated over the next three falling by 60% QOQ. quarters. Source: Colliers International. USD = 108 JPY using the historical average for Q1 2020. 1 sq m = 10.76 sq ft., 1 tsubo = 3.306 sq m. Note: Rent = net effective rent in JPY per tsubo per month based on NFA. Capital Values = JPY per sq m based on NFA. COLLIERS QUARTERLY OFFICE | TOKYO | RESEARCH | Q1 2020 | 15 APRIL 2020 Lessons learned from past crisis CBD Grades A rent (RHS) and vacancy forecast (inverted LHS) Q1 2020 rental growth remains flat Rent Vacancy% Oxford Economics revised down Japan’s GDP growth to negative 4.8% for 50,000 0.0% 2020, with a rebound to 3.9% for 2021 with postponement of the Olympics. 40,000 2.0% However, the extent of COVID-19’s impact on Tokyo office market was not yet Rent apparent in Q1 2020. CBD Grade A rents remained flat with little change in 30,000 4.0% vacancy despite more decisions making delays. Positively, the office market is 20,000 6.0% Vacancy entering into this crisis in a better shape than previous crisis given a historical Efficetive (JPY/tsubo/NFA) low vacancy from restricted net supply tracking around 1.0% of total stock and Net 10,000 8.0% a reasonable rental level tracking 35% below those in the run-up to the GFC in 0 10.0% 2008. However, with the odds of global recession rising, we believe that absent the large pre-commitments (tracking above 840,000 sq meters), the 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20 3Q21 2Q22 Source: Colliers International 2020 net absorption would spill into negative territory. Restricted supply until 2023 is to partially cushion the market downsides CBD Grade A net absorption, supply and vacancy Pre-commitment remains a key market driver representing 34% of total Net Absorption Gross Supply leasing volume in Q1 2020. Through Q4, CBD Grade A vacancy should rise 400,000 toward 3.0% as the 2020 net absorption should fall below 320,000 sq meters. However, this is to be offset by restricted gross supply of only 350,000 sq 300,000 meters through early 2023. 200,000 We expect the current landlords’ market to continue. Any downward pressure (sqm) on rent should manifest in fluctuating incentives including free-rent periods, 100,000 which remain unchanged at around 3.2 months since 2016. If demand 0 deteriorates further, we expect well-positioned landlords can increase the free 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 rent period toward the ten-year average or 4.5 months. Source: Colliers International Lower Real GDP growth to lower net absorption until mid-2022. 8.0% Net absorption (sq m) Real GDP Growth % forecast Real GDP Growth % ( t+2Q) 300,000 6.0% 250,000 4.0% 200,000 2.0% 150,000 0.0% 100,000 -2.0% 50,000 sqm Real GDP -4.0% 0 -6.0% -50,000 -8.0% -100,000 -10.0% -150,000 2 Source: Colliers International COLLIERS QUARTERLY OFFICE | TOKYO | RESEARCH | Q1 2020 | 15 APRIL 2020 Ranking average achieved rent by major CBDs Q1 2020 Market Survey (Unit : m2 unless otherwise noted) Under Area Achieved Rent Achieved Rent Available NFA Total NFA Construction - LTM 12 LTM 12 Net Grade A% Area per tsubo per m per sqm per m Vacancy (m2) (m2) 2020/2021 Delivery Absorption All Grades 1 Marunouchi / Otemachi ¥45,706 $128.0 1.0% (2,096) 2,475,428 59,600 31,000 36,563 95.8% 2 Nihonbashi / Yaesu / Kyobashi ¥43,020 $120.5 1.1% 29 1,020,792 - - 5,013 40.3% 3 Akasaka / Roppongi ¥40,659 $113.9 3.0% 8,791 1,747,797 1,652 - (30,044) 66.3% 4 Shiodome ¥39,871 $111.7 37.6% 82,211 289,949 - 2,500 (103,166) 79.3% 5 Shibuya / Harajuku ¥39,680 $111.1 2.3% 598 1,181,622 10,868 843 (9,163) 25.2% 6 Ebisu ¥38,529 $107.9 2.1% 6,127 339,776 - - (5,255) 44.5% 7 Toranomon / Kamiyacho ¥36,405 $102.0 2.1% (1,645) 1,094,500 1,774 46,018 49,297 64.0% 8 Shinagawa and Konan ¥36,224 $101.5 0.7% 2,282 904,974 - 900 (854) 69.9% 9 Yurakucho, Hibiya, Kasumigaseki ¥34,881 $97.7 0.5% (425) 904,743 880 - 17,054 73.1% 10 Ginza ¥33,395 $93.5 4.0% 2,428 512,157 - - (19,222) 23.9% 11 Nishi Shinjuku ¥33,317 $93.3 1.7% 10,896 1,765,467 - 4,919 (13,016) 80.0% 12 Kudan north, Jimbocho ¥32,351 $90.6 1.3% 7,340 672,117 - 15,855 9,588 38.7% 13 Hanzomon / Kojimachi ¥31,355 $87.8 1.0% 6,435 1,079,328 10,384 1,300 5,226 37.0% 14 Kanda / Akihabara ¥28,775 $80.6 0.4% (4,338) 892,609 17,649 - 1,172 25.4% 15 Mitsukoshi-mae ¥28,000 $78.4 0.0% (225) 539,781 - 27,505 31,034 34.4% 16 Yoyogi ¥27,532 $77.1 1.2% 2,324 411,004 - - (3,485) 50.4% 17 Yotsuya ¥25,896 $72.5 3.0% (1,700) 360,964 - 17,800 6,803 48.2% 18 Hamacho / Higashi-Nihonbashi ¥25,000 $70.0 0.2% 4,576 216,182 - - (337) 12.0% 19 Iidabashi and Suidobashi ¥23,261 $65.2 0.7% 475 293,861 - - (1,914) 36.6% 20 Shimbashi ¥22,958 $64.3 0.8% (1,316) 665,921 21,077 1,996 411 23.8% 21 Tsukiji, Hatchobori, Kayabacho ¥22,664 $63.5 0.4% (194) 987,718 13,350 1,185 3,214 26.4% 22 Harumi Kachidoki ¥21,714 $60.8 5.3% (6,168) 442,646 - - 19,839 60.0% 23 Ningyocho / Kodenmacho ¥19,593 $54.9 0.7% 1,521 360,219 - - (2,030) 0.0% 24 Tamachi / Hamamatsucho ¥19,347 $54.2 0.6% (699) 2,206,864 69,264 1,600 7,490 51.4% Source: Colliers International. Note1: Softbank has vacated over 83,000 sq meters occupying 28 floors in Tokyo Shiodome Building as they move their HQ functions to Waters Takeshiba. Note: Red refers to districts with major vacancy increases, Yellow refers to districts that have been impacted by large new supply during the past twelve months. The net effective rents are monthly rents on a net floor area basis. The above figures refer to all grade buildings unless otherwise noted. All grade refers to key buildings with average floor plates of 100 tsubo or larger with the majority of use dedicated to office. Grade A refers to those buildings with the total NFA of 10,000 tsubo or larger, built within the last fifteen years and are compliant with the government’s anti-seismic standards, originally established in 1981. 3 Primary Author: For further information, please contact: Mari Kumagai Katsuji Tokita Head of Research | Tokyo Management Director | Country Head | Japan +81.3.4572.1009 +81 3 4572.8607 [email protected] [email protected] Hazumu Iwase Executive Director | Capital Markets | Japan +81 3 4572.8603 [email protected] Hideki Ota Executive Director | Capital Markets | Japan +81 3 4572.1005 [email protected] Dick Olango Senior Director | Occupier Services / Project Management | Japan +81 3 4572.1004 [email protected] About Colliers International Colliers International (NASDAQ, TSX: CIGI) is a leading real estate professional services and investment management company.