Xymax Real Estate Institute

Office Market Report
Tokyo | Q2 2017
August 2, 2017

SummaryIn the June 2017 quarter, the Tokyo 23 Wards' office market remained tight with the low vacancy rate at the3% level. Although some of the new contract rent indicators showed slowdowns, it does not mean that theoverall market turned weak.

The vacancy rate was 3.66%, a decrease by 0.10 points. Decrease in Vacant Space was 232,000 tsubo
while the Increase was 217,000 tsubo; the decrease was larger than the increase. Vacancy Turnover Ratio(the ratio of vacant space leased during the quarter to all the vacancy stock) is rising.

New Contract Rent Index (the level of new lease rent) was 104, a decrease by 4 points. Contract Rent
Diffusion Index, calculated by subtracting the percentage of buildings with a rent decrease from thepercentage of buildings with a rent increase, remained unchanged over the quarter at +6.

Paying Rent Index (the level of new lease rent and the level of existing lease rent combined) was 91, anincrease by 3 points.

The free rent period is becoming shorter. Average Free Rent Month of Lease with Free Rent was 3.7
months, a decrease by 0.1 months.

The quarter's results somewhat varied. We will see whether they were the signs of change.

Office Market Report | Tokyo | Q2 2017
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 © 2017 Xymax Corporation. All rights reserved.

1Xymax Reall Estate InstiituteVaccancy
Figu
ure 1 shows changes in vvacancy rate
e in Tokyo 23
Wards since 201
11. The vacanncy rate in th
he secondqua
arter of 2017 decreased bby 0.10 pointts
quaarter-on-quarter to 3.66%%. The rate ke
ept
deccreasing sincee the third q uarter of 201
12.
Thee market rem
mained tight w
with the low vacancy rate
eat thet 3% level, reflecting thhe continuous strong
dem
mand of com
mpanies to exxpand the offfice space toaccommodate newn workers.. Available sp
paces on themarket are limitted in numbeer. Tenants offten takeavailable spacess in their currrent building
g to expand
their office. Somme tenants arre even waiting for new
availability in the building w
where they arre.
Figu
ure 2 shows a quarterly inncrease and a quarterly
deccrease in vaca
ant space (Inncrease and Decrease in
Vaccant Space). Both the inccrease and deecrease wereesmaaller than thoose in the preevious quartter because
thiss quarter hadd fewer new ccompletions.. The increaseewass 217,000 tsu
ubo while thee decrease wasw 232,000
tsubo; the decreease exceedeed the increa
ase for ten
connsecutive qua
arters since tthe first quarter of 2015,
influencing the continued deecrease in th
he vacancy
ratee.

Figu
ure 3 shows the Vacancyy Turnover Ratio
R(four-quarter movingmaverrage), which is the ratioof thet vacant sp
paces leased to tenants during thequa
arter to all the vacant offiice stock (vaccancy at thestarrt of the quarter + vacanccy added during thequaarter).
Thee graph show
ws a decreasee of the ratio in thisquaarter but it is still more thhan 1 point above theyea
ar-ago level. A slow upwaard movemen
nt continued,indicating that available
aspaaces are stead
dily taken up
pby tenants.
tOffice Marrket Reportt | Tokyo | Q2
Q 2017All the contents aare as of the datee of this report. Xymax
XCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real Estate
Institute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

2Xymax Reall Estate Instiitute

Neew Contracct Rent
Figu
ure 4 shows changes in t he New Con
ntract Rent
Inddex (Tokyo 233 Wards), whhich is the inddex of theleve
el of new lease rent. The index for thee secondquaarter of 2017 was 104, a ddecrease by 4 points fromm108
8 in the previous quarter. It decreasedd for the firsttime in nine qua
arters since tthe first quarrter of 2015.
Thee upward trennd continued
d for five yea
ars since thesecond quarter of 2012. We will pay atteention towhaat happens nextnto determmine whethe
er thedeccrease in this quarter wass only a temp
porarydeccrease or not.
Figu
ure 5 shows changes in t he New Contract Rent
Index by size off buildings. The index fo
or small andmedium buildin
ngs (gross flo
oor area: beloow 5,000tsubo) was 103, a decrease b
by 4 points anda the indexx
for large buildin
ngs (gross flo
oor area: over 5,000
tsubo) was 107, a decrease b
by 2 points.
Botth large build
dings and sm
mall and medium
buildings saw inncreases in n ew lease ren
nts since thethirrd quarter of 2012. The reent of large buildingsbrepeated a small increase annd decrease whilew
therent of small and medium b uildings kept increasing
for more than tw
wo years butt decreased thist quarterfor the first timee in ten quarrters. The groowth of newleasse rents is slo
ow regardlesss of the build
ding size.
ures 6 and 7 are changess in the Conttract Rent
Figu
Diffusion Indexx (DI) (Tokyoo 23 Wards, centralcthreewarrds). They sho
ow where thee changes inn new leaserents are headed. The DI in tthis quarter remained
uncchanged fromm the previouus quarter att +6 forTok
kyo 23 Wardss and decreassed by 3 points to +2 forr
the central threee wards. Thee DI remained
d positive forrnine consecutive quarters, mmeaning the buildings
withh a rent increease continueed to exceed
d thebuildings with a rent decreaase. The DI reemained
belo
ow ten and is nearing thee turning point (zero).
Succh trend is prrominent for the central threetwards,
at +2+ this quarter.

Office Marrket Reportt | Tokyo | Q2
Q 2017All the contents aare as of the datee of this report. XymaxXCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real Estate
Institute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

3

Xymax Reall Estate Instiituteme of the newncontractt rent indica
ators showeddSom
sign
ns of slowdow
wns. The renntal growth of new lease isslow
w despite the tight maarket with thet
3% leveelvacancy rate. Th
he reason beehind this situ
uation is thata greatgvolume
e of large neew completio
ons will starrt
nexxt year; landloords are careeful and not able
ato take astro
ong stand onn increasing the rent. Some landlords
putt priority on fillingfvacanccies rather th
han achievingghigh rent. Anoother reason may be foound on theetenants' side; they wait, unnless they arre in a hurryy,
unttil the impac
ct of the neew completiions become
ecleaar.

Payying Rent
Figu
ure 8 shows changes in t he Paying Rent
RIndex, inn
whiich new leasse rents andd existing lea
ase rents areebotth covered. The index inn the second quarter ofo201
17 was 91, ana increase bby 3 points. It continued
dthe modest gro
owth since thhe third qua
arter of 2013
3.
Thee increase wa
as contributeed by the inccrease in rentof newnlease annd by the inccrease in ren
nt of existing
gtenants.

Freee Rent
Figu
ure 9 shows changes in t he ratio of new leases
withh free rent too all the new leases (Ratioo of Free
Rennt Granted) and changess in the avera
age free rent
perriod (Average Free Rent Month).
Thee Ratio of Fre
ee Rent Grantted in the second quarterof 2017
2increaseed for all thee periods. Thee Average
Freee Rent Month of All the N
New Leases was
w 2.7
months, an increase by 0.1 m
months from the previousquaarter.
How
wever, such long-term freee rents are onlyolimited
to buildingsbtha
at had strugg
gled to attracct tenants orbuildings that are new comppletions. In overall,othefreee rent period is becoming
g shorter. As a result, theAveerage Free Re
ent Month off Lease with Free Rent
deccreased by 0.1 months too 3.7 months..
Office Marrket Reportt | Tokyo | Q2Q 2017
All the contents aare as of the datee of this report. Xymax
XCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real EstateInstitute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

4

Xymax Reall Estate Instiitute

Maarket CycleeFigu
ure 10 is a grraph plotted by quarter basedbon
vacancy rates on the horizonntal axis and the New
Conntract Rent In
ndex on the vvertical axis. It shows thatthe market is cyyclical; the plo
ot started to move tolow
wer right in 20001 (vacancyy up, rent dowwn) andrem
mained static in 2003-20004, then it started to moveeto upper
uleft in 2005 (vacanccy down, rennt up) and tolow
wer right again in 2008 (vaacancy up, reent down).
Thee market ente
ered the reco
overy phase in 2013 andrem
mained there in 2017. Thiss quarter, thee plot moved
dto thet lower leftt because thee vacancy ratte decreased
dbutt the new con
ntract rent al so somewha
at decreased..

ToppicFigu
ures 11 and 12 show the Contract Rent DI
toggether with th
he economicc indicators such as Bankof Japan'sJTankaan (short-termm economic survey) oflarg
ge non-manu
ufacturing coompanies andd the priceindex of Tokyo StockSExchannge. In generral, real estateeindicators are sa
aid to be rag
gging behind actual
ecoonomy, but th
he graphs shhow that the Contract
Ren
nt DI has a high correlatioon with actua
al economy.
Thee economy iss growing moodestly. It is thet third
longest growth in the post w
war period, lo
onger thana19900, with the cu
urrent Tankannthe bubble era aroundon the positive area and thee steady growwth of stock
pricces.
Our company su
urvey* foundd that demannd for officespa
ace will likely to continue as the surveyed
commpanies resp
ponded that tthey expect tot increase
the number of workers
w
and nneed to expa
and the officeespaace. Regarding the large vvolume of neew supply
starrting from 20018, some coompanies ressponded thatt
it wouldw
expandd the choicess of quality buildings,
whiile others said they will w
wait until 2018 to plan
reloocations and expansions. The survey resultsrshowthat companies are careful oon how muchh money tospe
end on lease of office spaace.
Succh changes inn market balaance are likely to
influence the rent of new leaase in the futture.

*Reeport "Metroppolitan Areas O
Office Demandd Survey"
rele
eased on the sa
ame day (Auggust 2, 2017)

Office Marrket Reportt | Tokyo | Q2Q 2017
All the contents aare as of the datee of this report. Xymax
XCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real Estate
Institute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

5Xymax Reall Estate Instiitute

Referencce

Office Marrket Reportt | Tokyo | Q2
Q 2017All the contents aare as of the datee of this report. XymaxXCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real EstateInstitute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

6

Xymax Reall Estate Instiitute

Office Marrket Reportt | Tokyo | Q2Q 2017
All the contents aare as of the datee of this report. XymaxXCorporationn does not guarantee the accuracy
y or completenesss of the information herein.
Copying, quoting, forwarding, distrributing, reprinting or any other usse of this report iss not allowed withhout prior permisssion from Xymax Real EstateInstitute Corporattion.
Copyright © 2017 Xymaax Corporation. All rights reserved.

7

Xymax Real Estate Institute

Appendix

Xymax REI Research Updates
Use of Properties Changed over Time•

April – June 2017

April 17, 2017

Properties are used for different purposes and such purposes are changing year after year influenced byvarious factors including economic changes. Changes are seen on each property. Examples are thebuildings that are constructed after former buildings were torn down, the buildings that are converted
to suit to different use, and the new buildings that are constructed on vacant land. People also noticed
that the street views have changed, but few studies visualized the changes with particular data.

•The city of Osaka provided the land use survey for this study. The focused area is the central part of thecity (Umeda, Yodoyabashi-Honmachi and Shinsaibashi-Namba) where large-scale developments
increased rapidly responding to the growing demand related to tourists from abroad. The changes instock of buildings and the use of buildings constructed after former buildings were analyzed. The study
found the following trends: buildings are becoming larger than before and more buildings are now usedfor purposes other than office.

New Ways of Working and New Types of Offices•

April 13, 2017

Concerns on labor shortage from aging population and declining working-age population madecompanies to take initiative more seriously to change how people work in order to keep workforce andimprove work efficiency.

•Xymax Real Estate Institute, last year, conducted two surveys on how to work. This report summarizes
the latest trends on changes in how to work and the relation between how to work and where to work
(current situation, challenges, future, etc.) from the viewpoint of both companies and office workers.

Contact

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

Office Market Report | Tokyo | Q2 2017
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 © 2017 Xymax Corporation. All rights reserved.

8