Xymax Real Estate Institute

Office Market Report
Tokyo | Q1 2016
April 28, 2016

Summary

In Tokyo 23 Wards' overall office market, both the vacancy rates and contract rent continued to improvereflecting the stable demand from corporate tenants and the limited supply of new spaces. A full-fledged
rent recovery is, however, achieved only in some cases because companies are cost conscious. Therefore
the overall rental growth remains slow.

Vacancy rates were 4.46%, decreased by 0.37 points from previous quarter; 15 straight quarters ofdecrease. Available spaces particularly in large buildings are steadily taken up by companies who areplanning to consolidate and/or relocate their offices.

New Contract Rent Index (level of new rents) was 97; an increase of 1 point from previous quarter. Contract
Rent DI (ratio of buildings with rent increase minus ratio of buildings with rent decrease) was +17. The rent
is growing at a modest pace.

Paying Rent (level of new rents and existing rents combined) was 84; an increase of 2 points from previousquarter.

Average Free Rent Month was 3.2 months, an increase of 0.3 months from previous quarter. Six-month freerents were given to 35.2% of all the contracts, an increase of 6.6 points from previous quarter.

Office Market Report | Tokyo | Q1 2016
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.

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Vacancy
Figure 1 shows changes in vacancy rates in Tokyo 23
Wards since 2011. The vacancy rates in the first quarterof 2016 decreased for the 15th consecutive quarter to
4.46%, a decrease of 0.37 points from 4.83% in theprevious quarter.
Demand for office spaces remains strong as many
companies plan a forward-looking relocation.
Vacancy rates in overall Tokyo are steadily decreasing
led by the active leasing in the central five wards. In
some cases, new constructions in central Tokyo are fully
leased before completion.
There is a constant strong demand for large buildings
as many companies are consolidating or relocating
offices to achieve higher work efficiency. The demand is
now expanded into the periphery areas such as
Shinagawa Seaside because centrally-located available
spaces are still extremely limited.
Available spaces are also rapidly disappearing inmedium-size buildings with a typical floor of 100-200
tsubo as they are highly regarded by potential tenants
for its usability and affordable rent level.
The factor behind this is the demand from companies
who are becoming more interested in theabove-average grade office buildings; these companies
are looking for a space for the purpose of expanding
business, attracting new employees or achieving higher
work efficiency. This explains why the vacancy rates ofwell-equipped buildings in a prime area are decreasing.
On the other side, however, the economic outlook israther uncertain. Many companies who wish to relocate
do not want an increase of fixed cost and therefore
accept only a minimum rent increase as possible. As
centrally-located new buildings are having a shortageof availability and an increase of rents, many companies
are easing their requirements of location orspecifications and consider offices from a wide range ofchoices.
Some companies decided to postpone the relocation
plan because they were not able to find a suitable office

Office Market Report | Tokyo | Q1 2016
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.

2Xymax Real Estate Institutespace. In such case, instead of relocation, companies
sometimes implemented ideas to improve the work
efficiency in their current office such as changing layout
or interior, organizing piles of papers or allowing
alternative working style.

New Contract Rent
Figure 2 shows changes in New Contract Rent Index, anindex of rent agreed for new lease. The first quarter of2016 was 97; a slight increase by 1 point from 96 in theprevious quarter. Although demand is strong and supply isshort, the rent in the overall market continues to grow only
at a modest pace.
Figure 3 shows changes in New Contract Rent Index by sizeof buildings. The index for small and medium officebuildings (gross floor area: below 5,000 tsubo) was 99
while that of large office buildings (gross floor area: over5,000 tsubo) was 105. This result indicates that the rent ofsmall and medium office buildings continues to growslowly while that of large buildings is starting to increase
more rapidly than before.
One reason behind the rental growth of large buildings isthat many corporate tenants are still relocating for thepurpose of achieving improved work efficiency. Largebuildings are particularly in demand because they can offer
a large floor plate. As a result, availabilities in large
buildings in central Tokyo are drastically being reduced
and companies have no way but to consider relocating to
the periphery area. Large buildings are therefore starting
to see a strong rental growth regardless of where thebuilding is situated.
The rent of small and medium buildings is on the rise
responding to the decrease in vacancy rates. This growth is,
however, only at a modest pace because some buildings
do not quite meet the relocation demand due to thebuilding's specifications and location.

Office Market Report | Tokyo | Q1 2016
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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Figures 4 and 5 are changes in Contract Rent Diffusion
Index (DI). The first quarter of 2016 was +17 for Tokyo 23
Wards and +13 for Central Three Wards; both increased for
four quarters in a row, indicating that the number ofbuildings with rent increase continued to exceed thenumber of building with rent decrease.

DI for Tokyo 23 Wards indicates a stable move in therecent four quarters: the ratio of the buildings with rent
increase stayed around 40% while that of the buildings
with rent decrease was between 20% and 30%.
Reflecting the shortage of available space in large
buildings in prime location, companies looking for anoffice space are becoming more flexible when choosing
a space to relocate. The buildings, which had not been
preferred in the past, have now being leased and therents are growing in some cases. In the overall market,
the recovery is spreading to broader areas.

Paying Rent
Paying Rent Index, in which new contract rents andexisting rents are both surveyed, show changes in therents paid by companies for office space and theincome generated from the office buildings. Figure 6
shows changes since 2005.
Paying Rent Index was 84 in the first quarter of 2016; anincrease of 2 points from the previous quarter (basedon Q1 2010 = 100); a first increase in three quarters.
Paying Rent Index had been on a modest rise after
bottoming in the third quarter of 2013, but now thepace has been slightly accelerated.
While the new rents are slowly increasing as mentioned,
some landlords are also requesting a rent increase
when the lease contracts of existing tenants arerenewed, which is starting to drive Paying Rent higher.

Office Market Report | Tokyo | Q1 2016
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 InstituteFree Rent
Figure 7 shows changes in the free rents given to all thenew contracts (Ratio of Free Rent Granted) and changes
in the average free rent period (Average Free RentMonth).
Ratio of Free Rent Granted increased in the first quarterof 2016 in all the categories. Although Average FreeRent Month with free rents remained flat, Average Free
Rent Month of all the contracts increased furtherquarter-on-quarter to 3.2 months.
While two-to-three months' free rents are becoming acommon practice, large buildings in central Tokyo are,in some cases, using free rents more strategically toachieve higher rents.
After a review of some data, figures for each quarter have beenrevised from the previous release.

Market 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, rentdown) 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, rentdown).
Office space market entered into the recovery phase.
This mode continued in 2016 too. However, the rental
growth is still weak compared to the solid decrease of
vacancy rates. The vacancy rates have been alreadyclose to the point where rents started to grow in theprevious market cycle. The drastic rental growth is seen
in some cases but a full-fledged rental increase ofoverall Tokyo 23 Wards is yet to come. Uncertain
economic outlook and oversupply of office spaces
ahead of the Olympic Games are part of the concerns inthe market. Therefore it is important to keep a close eyeon the market movements.

Office Market Report | Tokyo | Q1 2016
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.

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ReferenceOffice Market Report | Tokyo | Q1 2016
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.

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Xymax Real Estate Institute

Office Market Report | Tokyo | Q1 2016
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.

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Reference

Xymax REI Research Updates

January 2016 - March 2016

How long will the tenants stay in the shopping center?

March 23, 2016

• Shopping center tenants stay 10.7 years on average. Annual departure rate of sixth-year tenants is particularly high,18%.
• Core and semi-core tenants (≥150 tsubo) tend to stay longer, 18.8 years on average. After the sixth year, occupancy
period of small/medium tenants (< 150 tsubo) becomes longer.
• Reference: Retail tenants in office buildings resemble the pattern of office tenants.

Electric Power Consumption by Office Tenants (December 2015)

March 4, 2016

• The electric power consumed by office tenants in the autumn of 2015 (average of Oct, Nov and Dec) was 33.8
kWh/tsubo; a YoY decrease by 3.4% from 35.0 kWh/tsubo in the autumn of 2014.
• The average consumption in 2015 was 37.1 kWh/tsubo; a YoY decrease by 3.4% from 38.4 kWh/tsubo in 2014.

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

March 4, 2016

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

Office Stock Pyramid 2016

January 29, 2016

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

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

Office Market Report | Tokyo | Q1 2016All 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.

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