February 4, 2015

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Tokyo Office Space Market Index Q4 2014
Vacancy Rate | New Contract Rent Index | Contract Rent DI | Free Rent
Overall market is on a moderate recovery but increasingly polarized between winners and losers
depending on how well office spaces meet the needs of tenants seeking to move for positive purposes.
Xymax Real Estate Institute releases the fourth quarter 2014 results of the office space market indices:
Vacancy Rate, New Contract Rent Index, Contract Rent DI, Ratio of Free Rent Granted and Average Free
Rent (Month).
Indices were released separately before but are combined into one report since the previous quarter to help abetter understanding of the market. The vacancy rent data is a new addition in this quarter.
Market Conditions
Tokyo 23 Wards office space market is gradually recovering; vacancy rates down, rents up andfree rents down on the back of strong office demand and limited new supply.
The market is increasingly more polarized between buildings: those that meet the needs ofgood-performing companies who are seeking to relocate their offices for the purposes ofachieving better location, space expansion and/or upgrades have reduced vacant spaces andincreased rents while those that failed to meet such needs have decreased rents.
Market Trends in Tokyo 23 Wards based on Indices• Vacancy Rate is 5.73%.
A quarter-on-quarter decrease of 0.22 points and tenth consecutive quarterly decrease.
Demand continues to surpass supply.
• New Contract Rent Index (level of contract rent) is 94. (Q1 2010 = 100)
Overall index remained unchanged from the previous quarter; however, index for large
buildings (over 5,000 tsubo gross floor area) has increased by 4 points.
• Contract Rent DI (buildings with rent increase versus buildings with rent decrease) is 2.
Buildings with rent decrease slightly exceeded buildings with rent increase. This is the firstnegative figure in two years. Rent continued to decrease in less competitive buildings which
failed to take the needs of tenants who are seeking to move for positive reasons.
• Average Free Rent is 3.1 months.
Decreased by 0.4 months quarter-on-quarter. Long-term free rent (over 6 months) was given
to 25.1% of new leases; a decrease by 5.9 points quarter-on-quarter, indicating acompression of the free rent period.
--Explanations for the results of each index are available on the following pages.
Summary of the indices is available on 7. Index Summary.
Historical quarterly data is available on 8. Numerical Data for Entire Period.

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

11. Vacancy Rate
The vacancy rate, estimated by dividing the vacant area by the rentable area, shows the balance
between demand and supply in the office space market. The vacancy rate decreases when demandsurpasses supply such as when tenants actively expand spaces and increases when demand falls
below supply such as when new supply is too large but demand remains weak.
Figure 1 shows the vacancy rate in Tokyo 23 Wards for the past four years. The fourth quarter 2014
marked 5.73%, a decrease by 0.22 points from 5.95% in the previous quarter, decreased for 10 quarters
in a row. This decrease may be a result of increased demand for office space as companies are postingstrong results but new supply remains equivalent to that in the previous year.
Figure 1: Vacancy Rate in Tokyo 23 Wards

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

22. New Contract Rent Index
New Contract Rent Index is an office rent indicator based on contract rent with Q1 2010 as a base point(=100). Actual market conditions are more accurately reflected in this index using the contract rent data
than the index using asking rent data. Also, by using the statistical method, this index is free from factorsthat influence the rent, such as the gross floor area of the building and building age.
Figure 2 shows the historical New Contract Rent Index. The fourth quarter of 2014 was 94, flat
quarter-on-quarter but 7 points higher year-on-year, indicating a gradual rental growth.
Figure 2: New Contract Rent Index in Tokyo 23 Wards

Figure 3 shows New Contract Rent Index by size of office buildings. Medium and small buildings (lessthan 5,000 tsubo gross floor area) remained flat quarter-on-quarter at 97 while large buildings (over5,000 tsubo) saw an increase by 4 points.
Figure 3: New Contract Rent Index in Tokyo 23 Wards by Size of Buildings

5,000 tsubo = approx. 16,500 sqm

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

33. Contract Rent DIContract Rent Diffusion Index (DI) shows the changes in contract rent by comparing the number ofbuildings where contract rent has increased and the number of buildings where contract rent hasdecreased. Positive DI means spaces in more buildings were signed at a higher rent than before
whereas negative DI means spaces in more buildings were signed at a lower rent than before.
Figure 4 and Figure 5 show historical changes of Contract Rent DI. The DI for the fourth quarter 2014
was 2 for Tokyo 23 Wards and 4 for Tokyo Central Three Wards (Chiyoda, Chuo and Minato); bothshowed the buildings with rent down was slightly greater than that with rent up. This marked the firstnegative figure in two years since the fourth quarter of 2012 for Tokyo 23 Wards and the first negative
figure in one year since the fourth quarter of 2013 for Tokyo Central Three Wards.
Buildings that meet the positive relocation demand, such as for better location, space expansion orupgrade, succeeded in reducing vacant spaces and achieved higher rents. In contrast, buildings thatfailed to satisfy such demand due to poor location or poor building specifications continued to see theirrents to fall.
Figure 4: Contract Rent DI in Tokyo 23 Wards

Figure 5: Contract Rent DI in Tokyo Central Three Wards

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

44. Free Rent
Free rent is a time lag between the commencement of the contract and the start of the rent payment. Itreduces the occupancy cost of the tenants in relation to relocation. It is sometimes used as a means ofrent reduction when market conditions are difficult.
Figure 6 shows the ratio of new leases with free rent to all the new leases (Ratio of Free Rent Granted)
and the average free rent period shown in months (Average Free Rent). To grasp the trend, Ratio of Free
Rent Granted is classified into three categories based on the length of the free rent (1. One day andabove, 2. Two months and above 3. Six months and above) and Average Free Rent (Month) is classified into
two categories (4. Average of all the contracts 5. Average of contracts with free rent).

Ratio of Free Rent Granted for the fourth quarter of 2014 decreased for all the categories: 1. One day
and above was 64.5% ( 5.5 points, quarter-on-quarter) 2. Two months and above was 59.7% ( 4.1 points)

and 3. Six months and above was 25.1% ( 5.9 points). Average Free Rent (Month) also decreased
quarter-on-quarter: 4. Average of all the contracts was 3.1 months ( 0.4 months) and 5. Average ofcontracts with free rent was 4.8 months ( 0.2 months). A particular large drop was Ratio of Free Rent
Granted 3. Six months and above by 12.5 points, indicating that long-term free rents are becoming lesslikely to be granted thanks to the improved market balance.
Figure 6: Free Rent for New Lease in Tokyo 23 Wards

Q4 2011

Q4 2012

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Ratio of FreeRent
Granted1. One day and above

87.9%

67.0%

66.1%

69.9%

68.6%

70.0%

64.5%

2. Two months and above

79.6%

60.8%

61.4%

61.7%60.3%

63.8%

59.7%

3. Six months and above

52.2%

37.1%

37.6%

34.7%

28.9%

31.0%

25.1%

AverageFree Rent(Month)

4. All the contracts

4.8

3.8

3.8

3.7

3.3

3.5

3.1

5. Contracts with free rent

5.4

5.7

5.8

5.3

4.8

5.0

4.8

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

55. Current Position in Office Market Cycle
Figure 7 is a graph with vacancy rates on the horizontal axis and New Contract Rent Index on thevertical axis, plotted quarterly.
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).
According to the graph, the office space market as of 2014 is recovering from the doldrums started in
2010, with modest vacancy decrease and rent increase.
Figure 7: Office Space Market Cycle in Tokyo 23 Wards (New Contract Rent Index)

Figure 8 is a graph similar to Figure 7 but using the asking rents, not the contract rents. Compared toFigure 7, the timing of start of rent increase (the plot moving to upper side) is years slower in Figure 8. To
capture market trends, index based on contract rents is considered more appropriate than index basedon asking rents.
Figure 8: Office Space Market Cycle in Tokyo 23 Wards (Average Asking Rent)

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

66. Market Analysis Using Combined Data
Figure 9 shows New Contract Rent Index and Contract Rent DI in one graph.
Contract Rent increases when DI is positive and decreases when DI is negative. Contract Rent
drastically increased when DI is strong positive in 2006-2007 and drastically decreased when DI isstrong negative in 2008-2010. Thus, the combined data indicates the speed of rental changes.
Figure 9: New Contract Rent Index & Contract Rent DI in Tokyo 23 Wards

Figure 10 shows New Contract Rent Index and Average Free Rent (Months) (All the Contracts) in onegraph. (In the graph, the axis of the free rent was turned upside down to match with the ups and downs of themarket trends.)
As shown, although the length of the free rent period and ups and downs of rent are linked, a market recovery
comes faster for free rent and then followed by a recovery in rent. This indicates that free rent is acting as anadjuster for actual income recovery.
Figure 10: New Contract Rent Index & Average Free Rent (Month) (All the Contracts) in Tokyo 23 Wards

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

77. Index Summary
New Contract Rent

Vacancy Rate
Overview

Meaning

Contract Rent DIIndex

Area
Building Size

Average Free Rent (Month)

Proportion of vacant spaces in all

Office rent index based on

Index of changes in contract rent

Distribution of time lag between

the spaces available for rent incontract rent. Influential factors

estimated by comparing

start of contract and start of rent

the market

such as gross floor area andbuildings where rent has

payment. Average length of thebuilding age are adjusted byincreased and buildings wheretime lag.

using statistical method.

rent has decreased.

Contract rent level

Direction of contract rent trends

Market balance (supply anddemand)

SectorRatio of Free Rent Granted &Office Building

Markettrends

thatarenot

reflected in contract rent
Office Building

Office Building

Office Building

Tokyo 23 Wards

Tokyo 23 Wards

Tokyo 23 Wards / 3 Wards

Tokyo 23 Wards

All

All / Large (over 5,000 tsubo) /AllAll

Small-Medium (below 5,000tsubo)
Frequency

Quarterly

QuarterlyQuarterly

Quarterly

Since

Q1 2011

Q1 2001

Q1 2001

Q1 2002

Data of vacant spaces andContract rent data (incl. CAM)

Contract rent data (incl. CAM)

Contract data collected fromproperties independently

independently collected byindependently collected byproperties under Xymax's

collected by Xymax

Xymax

Xymax

management

Data Source

Data Volume

25,906 buildings

1,052 contracts

849 contracts

211 contracts(Latest Quarter)
Calculation• Vacancy rate
= vacant space ÷ rentable space• Vacant space
Total of vacant spaces ofcompleted buildings available
for rent as of the time of thisstudy.

1) Compare the data of contract

model (overlapping period:rent per tsubo in a particular

The period from the start offive quarters) based on theperiod with that in the 6-monthcontract to the start of rent,

collected new contract datawith factors like location, grossfloor area, building age,facilities, and date of signingof lease as variables.

• Rentable space
Rentable spaces ofcompleted buildings as of thetime of this study.

Where rentable space data is notavailable, the rentable space iscalculated from the gross floorarea of the building using theformula developed by the joint
study with the laboratory of• Free rent period

1) Develop a rolling hedonic

prior period in the same

shown in days.

building. Each data was• Ratio of Free Rent Granted

counted separately into three

The percentage of contracts withcategories (“rent increase”,free rent in all the new contracts“no change”, and “rent(excl. expansions within thedecrease”).

2) Quarterly contract rent isestimated by assigning theattribute values of a typical2) Estimate the ratio of “rentbuilding and recontracts)• Average Free Rent (Month)decrease” and the ratio of(All the Contracts)“rent increase”

The simple average of the free3) Subtract the ratio of “rentrent period including leasedecrease” from the ratio ofcontracts with no free rent.

“rent increase”. The figure• Average Free Rent (Month)derived is referred to as the(Contracts with Free Rent)

rent, estimated in 2 based on

Contract Rent Diffusion Index

The simple average of the free

Q1 2012 as base point (=100),(DI).

rent period of lease contracts

building to the model
developed in 1.
3) The amount of the contract

is referred to as the New

with free rent.
In some cases, the rent agreed

Contract Rent Index.

in a lease contract includes

Professor Naoki Kato at Kyoto
University Graduate School ofThis model can present historical

CAM charge, and then, for aEngineering.

changes in contract rent

certain period of time, the rent isreflecting the adjusted variables

reduced to the CAM charge

such as location, size, age andequivalent level or closer to thatfacilities of the building.

level, but such contracts areexcluded from this study.

Further information of the indices is available online:Contract Rent DI
http://www.xymax.co.jp/english/research/images/pdf/131211_News-release.pdf
New Contract Rent Index
http://www.xymax.co.jp/english/research/images/pdf/20140919-04.pdf
Free Rent
http://www.xymax.co.jp/english/research/images/pdf/20140919-03.pdf

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

88. Numerical Data for Entire Period

The information contained in this report is as of the date of preparation. XYMAX accepts no liability for any inaccuracies or omissions in this report.
No copying, quoting, forwarding, distributing, reprinting or any other use of this report is allowed unless prior consent from XYMAX is obtained.
Copyright © XYMAX Corporation. All rights reserved.

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