Xymax Real Estate Institute

Office Market Report
Tokyo | Q4 2015
February 3, 2016

Summary Tokyo 23 Wards' overall office market continued to see a shortage of available space because of the strong
demand from corporate tenants. Even so the growth of new rents remained modest. Companies are taking
forward-looking relocation strategies, such as seeking better location, expanding space or moving to ahigh-grade building. The buildings that meet such demands achieved higher rents, but overall rental growth
was probably affected by the decreasing or unchanging rents of buildings that failed to meet such demands.
 Vacancy rates decreased for 14 straight quarters, dropping 0.38 points to 4.83%. Overall market vacancy
decreased steadily. Available space has been in short supply particularly that of large buildings inhigh-demand areas.
 New Contract Rent Index (level of new rents) was 96; no change from previous quarter. Contract Rent DI(percentage of buildings with rent increase minus percentage of buildings with rent decrease) was +18.
 Paying Rent (level of new rents and existing rents combined) was 82; no change from previous quarter.
 Average Free Rent Month was 2.6 months, an increase of 0.4 month from previous quarter. Six-month freerents were given to 24.6% of all the contracts, an increase of 8.1 points from previous quarter; after a sharp
drop in the previous quarter, the level is now equivalent that of two quarters ago.
Office Market Report | Tokyo | Q4 2015

All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

1Xymax Real Estate InstituteVacancy
Figure 1 shows changes in vacancy rates in Tokyo 23
Wards since 2011. The vacancy rates in the fourth
quarter of 2015 decreased for the 14th consecutive
quarter by 0.38 points to 4.83% from 5.21% in theprevious quarter.
Overall market is reducing vacancies thanks to thestrong demand from companies of all industries andthe limited volume of supply.
Tokyo's central five wards are particularly in highdemand. Shibuya and Chiyoda Wards have only asmall volume of remaining vacancies and new vacant
space is soon taken by new tenants. In Chuo, Minato
and Shinjuku Wards, vacant spaces in large buildings
have decreased drastically.
Small and medium buildings in the five wards arealso successful in reducing vacancies if the buildings
offered convenient environment and their exterior
and interior gave a good impression.
This can be explained that the main purposes ofrelocation now come from forward-looking
strategies aiming to achieve business expansion
rather than the negative purposes commonly seen
since 2008 such as restructuring.
Companies planning a forward-looking relocation
are facing a need to expand office space for theexpected increase of workforce or for the businessexpansion plan. Some companies wish to move to ahigh-grade building to enhance the corporate brand
for business expansion or to attract future workers. In
such case, the desirable buildings should have asizable space, convenient location, good-looking
exterior and interior and be well-equipped.
Some companies decided to postpone or cancel
their relocation plan because there are not many
available office spaces that suit their demand.
Instead of relocation, the companies changed thefloor layout, decided to use a storage space outside
their office building, encouraged paperless work
style or decided to have a small sub-office space inprime location to attract job candidates.
Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real Estate
Institute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

2Xymax Real Estate Institute*1

In the survey of new supply released at the end of2015 by Xymax Real Estate Institute, the new supply
in Tokyo 23 Wards is 180,000 tsubo (rentable area) in2016 and 140,000 tsubo in 2017. This level isequivalent to or less than the ten-year average of
180,000 tsubo per year. If assuming demands fromcorporate tenants for office space to continue, themarket will likely continue to reduce its vacancies inthe meanwhile.
*1 Supply of New office Space 2016 (Tokyo & Osaka)
1 tsubo = 3.3 sqm

New Contract Rent
Figure 2 shows changes in new Contract Rent Index,
an index of rent agreed for new lease. The fourth
quarter of 2015 was 96; no change from the previousquarter. While available space is increasingly more
limited, the overall market is seeing a modest
increase of contract rents.
Figure 3 shows changes in New Contract Rent Indexby size of building. Small and medium officebuildings (gross floor area: below 5,000 tsubo) andlarge office buildings (gross floor area: over 5,000tsubo) both had a marginal increase from previous
quarter to 98 and 102, respectively.
Large buildings in high-demand areas are more likely
to meet the demand from companies withforward-looking relocation plan and the new rents ofsuch buildings continue to show a steady growth. In
Shibuya Ward, the rental growth is particularly
notable in buildings of any size.
Unlike large buildings, the rental growth of small andmedium buildings remained slow. Buildings locatedin the less convenient area, with less attractive
exterior and interior and low-grade equipment, areunlikely to be chosen by potential tenants. As a result,the new rents of such buildings are flat or on thedecrease in all building sizes.

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

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Xymax Real Estate InstituteFigures 4 and 5 are changes in Contract RentDiffusion Index (DI). The fourth quarter of 2015 was+18 for Tokyo 23 Wards and +13 for Central ThreeWards, both increased for three quarters in a row,indicating that the number of buildings with rent
increase continued to exceed the number ofbuildings with rent decrease.
A breakdown of DI indicates that the percentage ofthe buildings with rent increase was 42%, aquarter-on-quarter increase of 4 points, influenced
by the rental growth of large buildings in good andcentral location and also rents of other buildings
located slightly away from terminal stations alsoincreased if large spaces are available. The market
recovery is expanding across Tokyo.
However, there are also buildings with rent decrease,accounting for approximately 24% or increase of 1
point quarter-on-quarter. Leasing of less competitive
buildings located outside of the central five wards or
those with low-grade equipment are struggling.
Owners have no way but to reduce the rent toincrease the occupancy rate.
The market is getting ready for owners to increase
rents thanks to the recent strong market trends that
boosted the occupancy rate. Owners, however,continue to be careful on rapid rent increase. The
priority of many owners is to recover the weak
income since 2008 to an appropriate level.
Increasing rents in buildings that do not match
corporate tenant's forward-looking demand remaindifficult. The rents are flat or decreasing. Thesesituations influenced the slow growth of the rent
level in the overall market.

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

4

Xymax Real Estate Institute

Paying Rent
Paying Rent Index, of which new contract rents andexisting rents are both surveyed, show changes in
the rents paid by companies for office space and theincome generated from office buildings. Figure 6
shows changes since 2005.
Paying Rent Index was 82 in the fourth quarter of2015; no change from previous quarter (based on Q1
2010=100). Paying Rent Index is on a rise, albeit very
modest, after bottoming in the third quarter of 2013.
Due to the decrease in available space and theincrease of rents in new contracts, it is becoming
more difficult for companies to find an office space
as convenient as and similar building grade to theircurrent office without allowing a rent increase.

Free Rent
Figure 7 shows changes in the free rents given to all
the new contracts (Ratio of Free Rent Granted) andchanges in the average free rent period (AverageFree Rent Month).
Ratio of Free Rent Granted increased in the fourth
quarter of 2015 in all the categories; the level is now
equivalent to that of two quarters ago. Average Free
Rent Month is also the level equivalent to that of twoquarters ago, increased simultaneously for all thecontract average and the average of contract withfree rent.
This result indicates the decrease of long-term freerents offered as an incentive to attract tenants. The
new trend is short-period free rents which areoffered to avoid payment of double rents when
tenants relocate.

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

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Xymax Real Estate InstituteMarket Cycle
Figure 8 is a graph plotted by quarter based on
vacancy rates on the horizontal axis and New
Contract Rent Index on the vertical axis.
The graph shows that the market is cyclical: the plot
started to move to lower right in 2001 (vacancy up,rent down) and remained static in 2003-2004, then it
started to move to upper left in 2005 (vacancy down,rent up) and to lower right again in 2008 (vacancy up,rent down).
The office space market shifted to the recovery
phase and continued the trend in 2015 too. The
vacancy rate is decreasing consistently; however
rents agreed in new contracts are growing only
slowly. The vacancy level is nearing the point where
the sharp increase of rents started in the previous
cycle, but it is still too early to expect that the market
to follow the pattern in the past considering thegrowing gap within the market and the economic
uncertainty.

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

6

Xymax Real Estate InstituteReference

1 tsubo = approx. 3.3 sqm

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

7

Xymax Real Estate Institute

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

8Xymax Real Estate Institute

ReferenceXymax REI Research Updates
Office Stock Pyramid 2016

November 2015 - January 2016

January 29, 2016

• Office Stock Pyramid 2016 was released. In this pyramid chart, building stock in Tokyo is divided into two categories;
small and medium buildings and large buildings. The volume of the stock (rentable area, number of buildings) for
each age group is compared.
• Small and medium buildings in Tokyo are 28.4 years old on average while large buildings are 22.0 years old. Stock isaging; especially the small and medium buildings.

Supply of New Office Space 2016 (Tokyo 23 Wards & Osaka City)

December 24, 2015

• The new supply in Tokyo 23 Wards in the next four years is 186,000 tsubo per year on average; expected to increase
even further from the ten-year average in 2006-2015. The years 2018 and 2019, in particular, are expected to have alarge volume of new supply: over 200,000 tsubo each year.
• The new supply in Osaka City in the next four years is 17,000 tsubo per year on average; roughly a half of the ten-year
average in 2006-2015 of 30,000 tsubo per year.

Electric Power Consumption by Office Tenants (September 2015)

December 9, 2015

• The electric power consumption in the summer of 2015 (July to September) was 38.5 kWh/tsubo; a YoY decrease by
6.1% from 41.0 kWh/tsubo in the summer of 2014.

Energy Consumption and Energy Cost in Office Buildings (September 2015)

December 9, 2015

• Energy Consumption: The level in 2011 continued. Remained nearly flat.
• Energy Price per Unit: Started to fall in March 2015. Four points down from previous study in June 2015.
• Energy Cost: Decreased following the price drop. Three points down from previous study in June 2015.

Building Owner Survey 2015

November 26, 2015

• 90% of owners are over 50 years old. 60% have one or two properties• More than 70% fear the future of the business. Challenges differ depending on owner's age.
• Majority of owners will continue to own the building.

Work Style & Use of Office Space Survey 2015

November 18, 2015

• Recent progress in information technology enabled work style changes. Mobile working is one of them. If flexible work
style continues to expand, will there be any changes in company's office location strategy or any change in the use ofoffice space? Our research encompasses current situations and three-to-five year plans of companies in Japan
including obstacles against such plans. This is a summary of the results.

ContactXymax Real Estate Institute
Phone: +81 3 3596 1477
Fax:+81 3 3596 1478
info-rei@xymax.co.jp

Office Market Report | Tokyo | Q4 2015
All the contents are as of the date of this report. Xymax Corporation does not guarantee the accuracy or completeness of the information herein.
Copying, quoting, forwarding, distributing, reprinting or any other use of this report is not allowed without prior permission from Xymax Real EstateInstitute Corporation.
Copyright © 2016 Xymax Corporation. All rights reserved.

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