Xymax Real Estate Institute

Office Market Report
Tokyo | Q3 2018
November 7, 2018

Summary(1 tsubo = 3.3 sqm)

 In the July–September 2018 quarter, the Tokyo 23 Wards’ office market saw a continued drop in the vacancy
rate on the back of robust demand as companies required office space to secure personnel. There wereactive inquiries for vacancies, as evidenced by vacancies being filled before going on the market andvacancy information being met with a flood of applicants. New contract rent has risen sharply as a result.
 The vacancy rate was 2.01%, down 0.27 points from the previous quarter. The Decrease in Vacant Space
exceeded Increase, with vacant space decreasing by 252,000 tsubo and increasing by 223,000 tsubo. The
rise in the Vacancy Turnover Ratio (the ratio of vacant space leased during the quarter to the overallvacancy stock) continued to accelerate at 46.1%.
 The New Contract Rent Index (the level of new lease rent) was 122, up 9 points. The rising trend, which had
been mild up to now, seems to be gathering pace. The Contract Rent Diffusion Index, calculated bysubtracting the percentage of buildings with a rent decrease from that of buildings with a rent increase,remained above zero for the fourteenth consecutive quarter at +23.
 The Paying Rent Index (the level of new lease rent and that of existing lease rent combined) was
unchanged at 91.
 Average Free Rent Months of Lease with Free Rent was 2.9 months, down 0.2 months. Granting of freerent dropped further due to a lessors’ market, with a 4.2% ratio of free rent granted for six months or more.
Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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Vacancy

Figure 1: Vacancy Rate

Figure 1 is the vacancy rate in Tokyo 23 Wards

10%8%since 2011. The vacancy rate in Q3 2018 dropped

Q2 20129.27%

6%0.27 points quarter on quarter to 2.01%. The rate has
been declining consistently since Q3 2012.

4%

Companies are still hiring actively and there is2%

Q3 20182.01%

0%strong demand for office expansion in preparation
for a rise in headcount. Companies, regardless of size,

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

3.28%

2.96%

2.51%

2.28%

2.01%

Vacancy Rate

are also focusing on creating a comfortable officeenvironment to secure personnel, giving rise to
demand for high-quality office buildings.
Figure 2 shows the quarterly Increase and Decrease

Figure 2: Increase and Decrease in Vacant Space(tsubo)Increase

Decreasein Vacant Space. The increase was 223,000 tsubo

Vacancy Rate (right scale)

600,000

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

500,000
400,000
300,000
200,000
100,000
0

and the decrease was 252,000 tsubo. Decrease has
exceeded increase for 15 consecutive quarters since
Q1 2015, contributing to the constant decline in thevacancy rate.
There was a supply of multiple large properties in
Q3 2018, roughly all of which were fully occupied at
the time of completion due to strong demand.

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Increase

189,000

163,000

205,000

184,000

223,000

Decrease

241,000

197,000

256,000

212,000

252,000

Vacancy (right scale)

3.28%

2.96%

2.51%

2.28%

2.01%

Formerly-occupied spaces were often filled fromwithin the building before they went on the market.
Therefore, the shortage of existing vacancies has notbeen alleviated, resulting in continued excess ofdecrease in vacant space over increase.

Figure 3: Vacancy Turnover Ratio (4-quarter moving average)

Figure 3 shows the Vacancy Turnover Ratio

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

(four-quarter moving average), which is the ratio of
2018Q346.1%

vacant spaces leased to tenants during the quarter toall the vacant office stock (vacancy at the start of thequarter + vacancy added during the quarter).
The ratio in Q3 2018 was 46.1%, a rise for the sixth
consecutive quarter. Vacant spaces are being leased
up by tenants at an accelerating pace due to strains

Vacancy TurnoverQ3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

37.5%

38.1%

40.3%

42.8%

46.1%

in supply and demand in the office market, where
there continues to be more demand than supply.

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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New Contract Rent

Figure 4: New Contract Rent Index
180

Figure 4 shows the New Contract Rent Index, theQ2 2008
161

160

index of new lease rent levels. The index for Q3 2018
Q3 2018
122

140
120

Q1 2010100

100

was 122, a hefty 9-point rise from 113 in the previous
quarter. We believe that the escalation of theshortage of vacant space resulted in tighter supply80

Q2 201276

60

and demand, which has led to an accelerated rise in
new contract rent following a mild rising trend after
bottoming out in Q2 2012.

New Contract Rent Index

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

109

106

109

113

122

Figure 5 is the new contract rent index by Size of
Building. The index for both small & medium

Figure 5: New Contract Rent Index by Size of Building
200

5,000 tsubo and large buildings with a GFA of 5,000

190

180

tsubo or more rose from the previous quarter to 124.

160
140

124

146

120

buildings with a gross floor area (GFA) of less than

124

76

100
80

attention of tenants since there is a clear sense of
scarcity in vacancies in the current Tokyo 23 Wards

79

60

Office buildings of all sizes are attracting theoffice market overall. Inquiries for vacancies have
Small & Medium (GFA less than 5,000 tsubo)

Large (GFA 5,000 tsubo or more)

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Small & Medium Buildings

109

106

112

115

124

Large Buildings

111

108

117

116

124

been active, with vacancy information being met
with a flood of applicants, leading to a rise incontract rent levels regardless of size of the building.
Figure 6 shows the Contract Rent Diffusion
Index (DI), which indicates the direction of changes

Figure 6: Contract Rent DI

in new lease rents. The DI in Q3 2018 rose 1 point

Rent increased (percentage of buildings) (left scale)over the quarter to +23. The quarter marked theRent decreased (percentage of buildings) (left scale)Contract Rent DI (right scale)

fourteenth consecutive above-zero DI, which means

Contract Rent DI (four-quarter moving average) (right scale)

100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%

Q3 200751

Q3 2018
23

Q2 2009
-75

100
80
60
40
20
0
-20
-40
-60
-80
-100

the number of buildings with a rent increase
exceeded those with a rent decrease.
Although there has been a large supply of new
office buildings in 2018, companies’ strong demandis rising further, and it is expected that the tightContract Rent DI

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

13

17

15

22

23

office market will continue for some time. While acertain number of companies assume a wait-and-see
stance until the Tokyo Olympics, there have been
many cases where buildings scheduled forcompletion in 2019 are fully occupied at a high rent.

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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Paying Rent

Figure 7: Paying Rent Index
120

Figure 7 shows changes in the Paying Rent Index,

Q1 2009
105

110

which covers both new lease rents and existing leaserents. The index in Q3 2018 was unchanged at 91.

100
Q1 2010100

90

Q3 201891

80
Q3 201377

70
60

Since the paying rent index includes ongoing rent, its
trend is milder than the new contract rent index,
which is a timelier reflection of market trends.

Free Rent
Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

92

89

90

91

91

Paying Rent Index

Figure 8 indicates the trend of the ratio of newlease contracts with free rent to all new lease
contracts (Ratio of Free Rent Granted) and the

Figure 8: Free Rent

average free rent period (Average Free Rent

Free Rent Granted(left scale)

100%

Month). In Q3 2018, the average free rent month

1 day or more (%)
2 months or more (%)
6 months or more (%)
New lease contracts with free rent (month)
All new lease contracts (month)

Average Free Rent
(right scale)was 2.9 months for leases with free rent and 1.5
7
6

80%

5

60%

4
3

40%

2

20%

1

0%

0

months for all new leases, both a decrease by 0.2
months over the quarter.
The ratio of free rent granted long-term (sixmonths or more) dropped even further from theprevious quarter to 4.2%, falling below 5% for the
first time since Q2 2009. On the other hand, there

Ratio ofFree Rent
GrantedAverage
Free Rent
Months

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

1 day +

54.2%

53.6%

53.8%

55.2%

50.8%

2 mon. +

37.3%

38.4%

40.7%

42.1%

37.5%

6 mon. +

5.9%

6.3%

8.4%

6.7%

4.2%

All

1.5

1.6

1.7

1.7

1.5

w/ FR

2.8

3.0

3.2

3.1

2.9

Note: Figures for the last three years (from Q1 2015) have been revised due to the addition of new data
sources in the previous quarter.

remains to be a certain amount of short-term freerents, even though their ratio has dropped.
Note: Figures for the last three years (from Q1 2015) have beenrevised due to the addition of new data sources in the previous
quarter.

Market Cycle
Figure 9 plots vacancy rates on the horizontal axis

Figure 9: Market Cycle

and the New Contract Rent Index on the vertical axis

180

on a quarterly basis. It shows the cyclicality of theQ2 2008160

market, with the chart trending to the lower right in140
Q3 2018120

2001 (vacancy up, rent down), remaining static in

Q1 2001

2003–2004, then trending to the upper left in 2005

Q2 2003100(vacancy down, rent up) and to the lower right again
in 2008 (vacancy up, rent down).

80
Q2 2012

60
0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Vacancy Rate

3.28%

2.96%

2.51%

2.28%

2.01%

New Contract Rent Index

109

106

109

113

122

Note: Vacancy rates before March 2011 are based on data by a major leasing agent.

The market entered a recovery phase in 2013, withthe trend continuing in 2018. During Q3 2018, thechart moved to the upper left at an accelerated pace
due to a drop in the vacancy rate and a surge in rent.

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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Reference

Figure 10: Major Building Completions (Q3 2018)
FloorsAbove Ground /Below Ground

Ward

Address

Completion

Total floorarea(tsubo)OVOL Nihonbashi Building

15 / 3Chuo

3-4-4 Nihonbashi
Muromachi

2018/06

8,621

Otemachi PLACE (West Tower &East Tower)

35 / 3

Chiyoda2-3-2 Otemachi

2018/08

107,085

Shibuya Stream

35 / 4

Shibuya

3-21-3 Shibuya

2018/08

35,090

Nippon Life Hamamatsucho
Crea Tower

29 / 3

Minato2-3-1
Hamamatsucho

2018/08

30,031

Name

Source: Compiled by Xymax Real Estate Institute based on information released by companies.

Figure 11: Major Office Relocations (Q3 2018)
CompanyFromToshiba Memory

Hamamatsucho
Building

msb Tamachi Tamachi
Station Tower S

Minato Ward

Minato Ward

Tokai Tokyo Financial
Holdings

Nihonbashi Front

Nihonbashi Takashimaya
Mitsui Building

Sinanen Holdings

Head Office building

Toyo Construction
NIPPON STEEL
Chemical & Material

Chuo Ward

Minato Ward

To

Sumitomo Fudosan Mita
Twin Building West Wing

Size(tsubo)Jan 2019

Expansion

2,500

Jan 2019

Jan 2019

Minato Ward

Jimbocho Mitsui Building

Koto Ward

Chiyoda Ward

Chiyoda Ward

Purpose

Chuo Ward

Aomi Frontier Building
Akihabara UDX

Month
Year

Nittetsu Nihonbashi
Building

Nittetsu Kobiki Building Chuo WardFeb 2019

Greater
productivity,
BCP measures
Consolidation,betterefficiency
Betterefficiency

2,800

780
1,300

May–Jun2019

Company
integration

1,500

Oct–Dec
2019

Expansion,
betterefficiency

3,440

Chuo Ward

Sekisui Chemical

Toranomon 2-chome
Tower

The Okura Tokyo Prestige
Tower

Minato Ward

Minato Ward

Source: Complied by Xymax Real Estate Institute based on information released by companies.
The sizes of office space are estimates.

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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Survey Overview
Increase and Decreasein Vacant Space

Vacancy Rate

Description

Main Point

Vacancy Turnover Ratio

Vacant space versus total office stock in themarket.

A quarterly increase and a quarterly decrease The ratio of the vacant space leased during
Office rent index based on new contract rents.
in volume of vacant space in the market.
the quarter to all the vacant office stock in the This index uses a statistical method to remove
market.
property-specific influences such as size andage of buildings.

Supply and demand balance in the market

Supply and demand balance in the market

Supply and demand balance in the market

SectorOffice Building

MarketTokyo 23 Wards

Building Size

All

All

ReleaseData Source

Data Used in
Recent Quarter

32,744 buildings• Rentable Space
Rentable space of completed buildings as of
the time of the research.
Where rentable space is not available, therentable space is estimated from the grossfloor area of the building using the formuladeveloped in the joint study with thelaboratory of Professor Naoki Kato at Kyoto
University Graduate School of Engineering.

16,418 contracts• Increase in volume of vacant spacea. Space in existing buildings formerly
occupied by tenantsb. Total rentable area of new completions• Decrease in volume of vacant spacea. Space in existing buildings leased under a
new agreementb. Space in new completions but lease issigned prior to the completionc. Space that had been vacant but the owner
decided not to lease

16,418 contracts

745 contracts• Vacancy Turnover Ratio= Volume of vacant space leased during thequarter ÷ (Initial vacancy + Vacancy added
during the quarter)
Then, compute the four-quarter moving
average amount with the ratio derived fromthis formula.

1) Develop a rolling hedonic model(overlapping period: five quarters) based on
the collected new contract data withproperty-specific factors as variables(location, building size, building age, facilities,
date of signing of lease, etc.).

• Volume of vacant space leased during thequarter: Same as the "decrease in volume ofvacant space).
• Initial vacancy: Total volume of completedbuildings that are available for lease as of thestart of the quarter.
• Vacancy added during the quarter: Same as
the "increase in volume of vacant space"

Where rentable space is not available, therentable space is estimated from the grossfloor area of the building using the formuladeveloped in the joint study with thelaboratory of Professor Naoki Kato at Kyoto
University Graduate School of Engineering.

Contract Rent DI

Main Point

Direction of contract rent trends

Level of rents paid by tenants
Office Building

All

Market trends that are not reflected in contract rents

All

ReleaseHow toCalculateThis model shows changes in new contract
rents after removing property-specificvariables.

Index of changes in paying rents (new and existing contract Distribution of free rent and average length of free rent
rents).
period. Free rent is the time lag between the start of thecontract and the start of the rent payment.

Tokyo 23 Wards

Data Used in
Recent Quarter

3) The New Contract Rent Index is the rent
estimated in the preceding step based on Q1
2010 as the base point (=100).

Index of changes in new contract rents. Calculated bycounting and comparing the buildings where rent has
increased and those where rent has decreased.

MarketData Source2) Estimate the quarterly contract rent by
assigning the values of a typical building to
the model developed in the preceding step.

Free Rent Granted (%) &Average Free Rent (Month)

Paying Rent Index

SectorBuilding Size

All / Large / Small & Medium

Data of available vacant spaces and buildings. Data of available vacant spaces and buildings. Data of available vacant spaces and buildings. Data of new contract rents including CAM
Independently collected by Xymax.
Independently collected by Xymax.
Independently collected by Xymax.
charge. Independently collected by Xymax.

• Vacant Space
Total available vacant space in completedbuildings as of the time of the research.

Description

All

Level of contract rents

Every Quarter• Vacancy rate
= vacant space ÷ rentable space

How toCalculate

New Contract Rent Index

All

Every Quarter
Data of new contract rents including CAM charge.
Independently collected by Xymax.

Data of new and existing contracts signed for buildings
under management by Xymax.

1,122 contracts

Data of new contracts signed for buildings undermanagement by Xymax.

3,711 contracts

240 contracts

1) Compare the data of new contract rent per tsubo with
1) Calculate the rent per tsubo of each tenant from the data • Free Rent Periodthat in the 6-month prior period in the same building.
of new and existing lease contracts and memorandums.
The period between the start of the contract and the start
Each contract was counted separately into three categories: 2) Develop a rolling hedonic model (overlapping period:of the rent, shown in number of days.
buildings withfive quarters) based on the rents calculated in the preceding • Ratio of Free Rent Granted"rent increase”,
step (the "paying rent") with property-specific factors as
The ratio of contracts with free rent in all the new contracts"no change” orvariables (location, building size, building age, facilities,(excl. contracts for expansion within the building and“rent decrease”
date of signing of lease, etc.).
recontracts)
3) Estimate a quarterly contract rent by assigning the values • Average Free Rent (Month) of All the Contracts2) Calculate the percentage of buildings with “rentof a typical building to the model developed in the
The simple average of the free rent period including leasedecrease” and buildings with “rent increase”.
preceding step.
contracts with no free rent.
4) The Paying Rent Index is the rent estimated in the• Average Free Rent (Month) of Contracts with Free Rent
3) Subtract the percentage of buildings with “rent decrease” preceding step based on Q1 2010 as the base point (=100). The simple average of the free rent period of leasefrom the percentage of buildings with “rent increase”. This
contracts with free rent.
outcome is the Contract Rent Diffusion Index (DI).
With this method, influences from replacement of sample
data and deterioration of buildings over age are removed In some cases, the rent agreed in a lease contract includes
from the result.
CAM charge, and then, for a certain period of time, the rent
is reduced to the CAM charge equivalent or closer level, butsuch contracts are excluded from this research.

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

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Appendix
Xymax REI Research Updates
Office Space per Person 2018

August 2018 – October 2018

September 27, 2018

・

Office space per person in the Tokyo 23 Wards was 3.85 tsubo in 2018.

・

The office space per person for new tenants was 3.82 tsubo, smaller than 3.87 tsubo for existing tenants.

Building Owner Survey 2018
1.

October 25, 2018

Profile of building owners
・More than 60% of the business managers are aged 60 or older. 70% of the building owners own one or two
properties.

2.

The current building lease business・

To more than 80% of owners, the attractiveness of the building lease business is stable income.

・

Of the various measures in the building lease business, a large percentage of owners place importance on
and implement “responding to tenants’ requests” and “refurbishment or renovation of building.” While theyplace importance on “preparing a medium- to long-term repair plan” and “renovating existing
non-conforming buildings,” not a lot of them implement them.

3.

The future building lease business・

Short-term (around three years) outlook: 40% are optimistic, exceeding pessimistic views of 17%.
Medium- to long-term (five to ten years) outlook: 36% are pessimistic, exceeding optimistic views of 23%.

・Interest in future changes in society: “Decreases in the population and the number of workers” accounted
for 73%, far exceeding other items.

4.

Building owners who are conscious of planned maintenance・

Building owners with a medium- to long-term repair plan implement all measures such as “refurbishment
or renovation of building” and “responding to tenants’ requests” at a greater rate than building owners
without a repair plan and are more optimistic about the outlook.

5.

Efforts made in order to be chosen by tenants
・

Examples of efforts to overcome challenges and concerns in the future building business were obtained
from the interviews.

Contact for inquiries concerning this report
Xymax Real Estate Institutehttps://soken.xymax.co.jp
PHONE: +81 3 3596 1477 | FAX: +81 3 3596 1478 | E-MAIL: info-rei@xymax.co.jp

Office Market Report | Tokyo | Q3 2018
The contents of this report are as of the time of writing. Xymax Real Estate Institute does not guarantee their accuracy or completeness.
This report may not be reproduced, cited, transmitted, distributed, or reprinted without prior permission of Xymax Real Estate Institute.

Copyright © 2018 Xymax Corporation. All rights reserved.

7