Xymax Real Estate Institute

RESEARCH REPORTSurvey of Increase and Decrease in Vacant Office
Space(Tokyo 23 Wards)
A new benchmark for gaining insight into market mechanisms thatvacancy rates alone cannot offer

January 23, 2017

Xymax Real Estate Institute (hereinafter, “Xymax REI”) has conducted a survey on the increase and decrease invacant office space, using vacancy data obtained and accumulated by the Xymax Group. This report introduces
the outline of the survey. Going forward, Xymax REI plans to include future findings in its quarterly “OfficeMarket Report - Tokyo.”
The supply-demand gap of the office space market is manifest in vacancies, which are most commonlymeasured in the form of vacancy rates. The vacancy rate is the ratio of vacant floor space to total leasable floor
space at a certain point in time. In general, a low vacancy rate means that the stock of vacant space is small andthe market is robust, while a high vacancy rate indicates a large amount of vacancy and a weak market.
However, vacancy rates are, so to say, snap shots that show the supply-demand gap as of a certain point intime. When vacancy rates fall, it is difficult to determine the background of the supply and demand, such aswhether the fall was due to a rise in demand on the back of a robust market or whether it was simply the resultof little supply. Furthermore, a stable vacancy rate may seem to indicate an unchanging space market, but themeaning of the number will change depending on whether the rate was attributable to demand or to supply.
As shown in Figure 1, the actual office space market comprises an increase in vacant space due to: (a)tenants vacating existing properties; and (b) the supply of newly completed properties, and a decrease invacant space due to: (c) tenants occupying vacancies of existing properties; (d) pre-leasing of newly completedproperties; and, although small in number, (e) refusal of renting out vacancies. Vacancy rates are an indicationof the consequence of these developments.
Figure 1: Mechanism of Increases and Decreases in Vacant Space

Survey of Increase and Decrease in Vacant Office Space(Tokyo 23 Wards)
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2018 Xymax Real Estate Institute Corporation. All rights reserved.

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RESEARCH REPORT｜Xymax Real Estate InstituteTo understand such changes in the volume of vacancies in the office market, Xymax REI surveyed andaggregated the data of vacant floor space that was consumed (i.e., decreased) (mainly floor space that became
occupied by tenants) during the survey period and the vacant floor space that was produced (i.e., increased)(mainly floor space that was vacated by tenants as well as newly completed floor space), and compiled the data
as “increase and decrease in vacant space.”
This survey aggregated the data of the increase and decrease in vacant space, adjusted by floor space invacant block units. In addition to the floor space of newly completed properties, the survey takes account of
the increase and decrease in vacant floor space of existing properties, making the survey unique in that itprovides insight into the stock of vacancies and the size and changes in the corresponding transaction volume
during the survey period.

Description of the Survey
In this survey we calculated the increase and decrease in vacant floor space using vacancy data collected byXymax. The targets of the survey were office space located in Tokyo 23 Wards. Expansions in the same building
are not included.
Definitions of terms are as follows.
① Increase in vacant floor space
Floor space that was occupied at the end of the previous month but became vacant during the month.
The following were treated as an increase in vacant floor space.
Floor space of existing properties vacated by tenants

Total leasable floor space of newly completed properties② Decrease in vacant floor space
Floor space that was vacant at the end of the previous month but became occupied during the month.
The following were treated as a decrease in vacant floor space.
Floor space of existing properties newly occupied by tenantsOf the total leasable floor space of newly completed properties, the floor space that has alreadybeen taken by tenants at the time of completion

Vacant floor space of existing properties that the owner refuses to rent out

Survey of Increase and Decrease in Vacant Office Space(Tokyo 23 Wards)
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2018 Xymax Real Estate Institute Corporation. All rights reserved.

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RESEARCH REPORT｜Xymax Real Estate Institute
Survey Results
Figure 2 shows the quarterly trend of the increase and decrease in vacant floor space. The increase anddecrease in vacant floor space are indicated as a bar chart, and the vacancy rate is expressed with a line chart.
Figure 2: Increase and Decrease in Vacant Space(tsubo)

Increase

Decrease

Vacancy Rate (right scale)

600,000

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

500,000
400,000
300,000
200,000
100,000
0Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016
Increase

217,000 220,000 204,000 345,000 184,000

Decrease

256,000 273,000 253,000 354,000 222,000

Vacancy (right scale)

5.21%

4.83%

4.46%

4.45%

4.08%

The above chart shows an overall trend in which the volume of vacant space decreases as the vacancy ratefalls. In each quarter, the vacancy rate drops when the decrease in vacant floor space (right bar chart) exceeds
the increase in vacant floor space (left bar chart). On the other hand, when the increase in vacant floor spaceexceeds the decrease, the vacancy rate rises.
Looking at individual quarters, demand in Q2 2016 seems to be sluggish with the vacancy rate at 4.45%, only
0.01 point down from the previous quarter. However, when we look at the increase and decrease in vacantspace, the data suggests that despite the increase in vacant space (supply) in Q2 2016 being larger than in theprevious and following quarters, there was enough demand to absorb the increase. This was probably because
tenants who potentially intended to relocate or expand but did not do so as they could not find a property thatsuited their needs due to lack of vacant stock took up vacancies as supply (i.e. vacant stock) increased. The dataof this quarter indicates that an unchanged vacancy rate does not necessarily point to sluggish demand, andsuggests that there are various backgrounds to the developments.

Survey of Increase and Decrease in Vacant Office Space(Tokyo 23 Wards)
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2018 Xymax Real Estate Institute Corporation. All rights reserved.

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RESEARCH REPORT｜Xymax Real Estate InstituteMarket Mechanism and Indicators
Figure 3 illustrates the mechanism of fluctuation of the office space market. The supply and demand ofoffice space are affected by domestic and international social/economic situations. For example, improved
corporate earnings lead to employment and capital expenditure, giving rise to office demand. Vacancy rates
will drop if demand exceeds supply, which will eventually lead to rising rent if this supply-demand situation
continues. Meanwhile, the supply of office space depends largely on the business strategy of real estatedevelopers. Excessive supply against demand for office space will lead to a widening of the supply-demand gap,
an increase in vacancies and a downward pressure on rent.
Since office rent is a fixed cost that accounts for a large portion of facility costs of companies, the fluctuationof rent will have an effect on companies’ real estate strategy. For real estate developers on the other hand,vacancies and rent are also important factors that impact their business profitability. Thus, vacancies and rent,
which are indicators of the supply-demand gap, are “compasses” of the developments of the office spacemarket.

Figure 3: Mechanism of the Office Space Market

Fluctuation of rent

Supply-demand gap⇒ Vacancy
Demand for
office space

Companies' real estate strategy

Supply ofVS.
office space

Developers' strategy

Domestic social and economic situations

International social and economic situations

In Japan, vacancy rates and asking rent are well-known indicators of the trend of the office space market. In
other countries, however, contract rent is highly rated as being reliable and vacancy rates are not only offered
as a simple indicator of consequences but are provided along with the background of the changes in thevacancy situation. This survey hopes to offer help in revealing the actual state of the market by supplementing
vacancy rates.
As the above figure indicates, the mechanism of the office space market is complex and cannot be explainedby a single indicator. It is necessary to conduct comprehensive analysis and judgment using multiple indicators
to correctly understand the market’s development. Going forward, Xymax REI intends to publish usefulindicators such as the indicator introduced in this report on a regular basis as well as continuing to develop
new indicators and provide information to achieve further transparency.

Survey of Increase and Decrease in Vacant Office Space(Tokyo 23 Wards)
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2018 Xymax Real Estate Institute Corporation. All rights reserved.

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RESEARCH REPORT｜Xymax Real Estate Institute

Survey Overview
Name

Survey of increase and decrease in vacant space

Characteristics

Increase and decrease of vacant floor space during the survey period

Survey target

Office space located in Tokyo 23 Wards

Aggregation
unit

Vacant block units

Aggregation
periodFrom March 2011 to September 2016

Publication
frequency

Quarterly

Data source

Vacant block data and property data collected by Xymax

No.of samples

Q3 2016: 31,123 blocks*To be continued thereafterContact for inquiries concerning this report
Xymax Real Estate Institutehttps://soken.xymax.co.jp
TEL: +81 3 3596 1477 | FAX: +81 3 3596 1478 | E-MAIL: info-rei@xymax.co.jp

Survey of Increase and Decrease in Vacant Office Space(Tokyo 23 Wards)
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.
Copyright © 2018 Xymax Real Estate Institute Corporation. All rights reserved.

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