June 1, 2015

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Projection of Future Repair Costsof Tenant-Occupied Office Buildings in Tokyo
Market volume is expected to remain high after the Tokyo Olympic Games
Xymax Real Estate Institute made a projection of future repair costs of the tenant-occupied officebuildings in Tokyo 23 Wards. As Japan's building industry is shifting from the traditional "Scrap andBuild" to so-called "Stock Type" where buildings are more sustainable, a proper maintenance based ona medium- to long-term plan is essential in providing good office spaces for a long time to come. Xymax
Real Estate Institute estimated the market volume of repair costs until 2054. (See Note 1 for the types ofrepairs covered in this study.)

For the next 20 years, the repair market of Tokyo 23 Wards tenant-occupied
office buildings will continue to grow until the Tokyo Olympic Games in 2020
and then remain high at around JPY 300 billion. (See Figure 1)

Figure 1: Market Volume Projection: Repair Costs of Tenant-Occupied Office Buildings 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.

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Note 1: Repairs covered in this study
Repairs of tenant-occupied office buildings can be classified
as follows:
・ Common Area or Exclusive Area
・ Costs Borne by Owner or Borne by Tenant
This study covers Repairs, Value Engineering and Restoration.
Tenant improvements are excluded because the costs andspecifications vary greatly depending on the building.
Repairs
Repairs to sustain original building functionality such as
repairs of air conditioner, electric machine, exterior wall andinterior materials that have deteriorated over time. The
purpose is to make them operable again or to restore theinitial conditions.
Value Engineering

Bold line: Included in this study

Improvements to increase the value of the building when, forDotted line: Not included in this study

example, there is significant deterioration in performance offacilities or systems, or when the specifications of the building became obsolete, or when it became difficult tomaintain security with the existing specifications. Examples of this include a renovation of the entire building,installation of an energy-saving system and improvement of seismic performance. This study, however, covers
only the large-scale renovations of the common area.
Restoration
In accordance with the lease contract, at the end of occupancy, the tenant vacates the office space after restoring
the space to its original state.

Repair Market Volume by Size of Office Buildings
The repair market volume of large buildings will continue to grow year by year until 2054 while that of small
and medium buildings will reach its peak by 2027 and rise and fall frequently after that. (Figure 2)
Figure 2 shows the estimated repair costs of the large buildings and the small and medium buildings (*1) until
2054. In general, replacements and improvements of large facilities start after approximately 15 years fromthe building's completion, and therefore the costs tend to increase from that point (Note 2).
Large buildings have been constructed year after year until now. If this momentum continues, the repair
market volume is expected to grow even further.
In contrast, constructions of small and medium buildings have been limited after the large volume of supply
during the bubble period (*2). Accordingly, the market volume remains high until 2027 as facilities are being
replaced, and after that, unlike large buildings, the market volume repeats modest ups and downs.
*1*2

Large buildings: gross floor area of over 5,000 tsubo (674 buildings and 11,260,000 tsubo in total)
Small and medium buildings: gross floor area of 300-5,000 tsubo (6,425 buildings and 7,420,000 tsubo in total)(as of November 2014)
1 tsubo = 3.3 sqm
Office Stock Pyramid 2014 by Xymax Real Estate Institutehttp://www.xymax.co.jp/english/research/images/pdf/140417_News-release.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.

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Figure 2: Market Volume Projection: Repair Costs by Size of Buildings

Note 2: Repair Schedule of a Typical Office Building for 50 Years
Assumption: 2,700 tsubo building, 9 floors with a basement, completed in 1990
Below shows the repair schedule for 50 years from its completion. Large-scale replacements andimprovements start from around the 15th year. All the facilities are replaced within approximately 30years.

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Conclusion
As an important social asset where corporate business activities are based, office buildings must be kept
in a good condition and functional for a long time into the future.
This study provided approximate total costs required for repairs of office buildings. A large volume ofsmall and medium buildings constructed in Tokyo 23 Wards during the bubble period (and also prior) will
become older and require more expenditure on repairs. Whether those buildings will be properly
maintained is important in the office space market in the future because well-maintained office buildings
can continue to be functional and achieve stable rental income.
This study and analysis is based on the data of 1,900,000 tsubo of office spaces. The future office stock
was estimated based on the advice, on the estimation method reflecting information such as the officebuildings to be demolished, given by Professor Yukio Komatsu of School of Creative Science andEngineering, Waseda University.
Xymax Real Estate Institute will continue to study social issues and share our findings through news
releases and other means.

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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Repair Costs of Tenant-Occupied Office Buildings in Tokyo
Data of Office Buildings Used in This Study
Subject Market:

Tokyo 23 Wards

Subject Buildings:• Gross floor area of over 300 tsubo• Less than 50 years from completion• Used mainly as an office space Data was collected from publicly available information such as newspaper articles and rental information (including
those in the past). Data of buildings accompanied with the data of building age was used in this study.
Owner-occupied buildings are excluded.
 In general, "the bubble period" refers to 1985-1991. In this study, however, considering the development period, we
included three more years; therefore "large volume of supply in the bubble period" refers to the new supply(completion of new buildings) in 1985-1994.
 Changes in office stock after 2015 are estimated based on the assumptions of new supply and demolition of officebuildings estimated from the gross floor area of past supply. The results are shown by year of building completionand by size of buildings.

Estimation of Repair Costs
Xymax Standard LCC, which is a repair schedule index developed based on 84,000 cases of repairs performedby Xymax Group, is used in the estimation of a repair schedule for the next 60 years. The results of theestimation are shown by age of buildings.

Assumptions of building specifications (system, number, volume, etc.) are based on the gross floor area, numberof floors and year of completion and in line with the legal regulations. The building specifications must besufficient for the office space to be leased at market rent.
Example of building specifications: gross floor area of 2,700 tsubo, 9 floors with a basement, completed in 1990
Waterproofing:Waterproof asphalt concrete

Exterior Wall:

Tiled wall

Air Conditioner:

Individual air conditioning

Parking System:

1 horizontal parking system for 30 vehicles

Elevator:

3 units

Examples of "Renovation of Common Area (Value Engineering)" are renovations of toilet, kitchenette, entrance,
signage and elevator interior. However, the replacement of wall cloth in elevator hall due to deterioration for use
over time is regarded as "Repairs".

The restoration of the tenant occupied area (exclusive area) includes the following:•Replacement of floor tile carpet•

Replacement or recoating of wall cloth•

Coating of rock wool insulation ceiling panel•

Coating of entrance fittings and window ledge•

Removal of LAN cables and wiring under the raised floor•

Replacement of fluorescent bulbs•

Replacement of key lock, cleaning•

Preparation of the restoration such as protective coating, scaffolding, etc.

Removal of partition, installation of additional power source and removal of air conditioner are excluded.
Tenant improvements of the exclusive area are not included in the repair costs in this study.

Facilities and specifications of large buildings vary depending on the building. We, therefore, made a specificstandard for this study. Also please note that the installation and renovation of system that will be demanded due
to changes in environment in the future, such as increased demand for seismic enhancement after a greatearthquake, are not considered in this study.

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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