Xymax Real Estate Institute

Office Market Report
Tokyo | Q4 2018
February 6, 2019

Summary(1 tsubo = 3.3 sqm)

 In the October–December 2018 quarter, the Tokyo 23 Ward’s office market saw a continued drop in thevacancy rate on the back of tight supply and demand as many companies sought office space as part oftheir efforts to strengthen recruitment. Tenants’ demand for offices was strong, with vacancies that arosewhen companies relocated being filled before going on the market. New contract rent has remained on arising trend accordingly.
 The vacancy rate was 1.71%, down 0.30 points from the previous quarter. The decrease in vacant spacecontinued to exceed the increase, with vacant space decreasing by 201,000 tsubo and increasing by
165,000 tsubo. The vacancy turnover ratio, which is the percentage of vacant space leased during thequarter to the overall vacancy stock, rose by 3.6 points to 49.7%, a rise for the seventh consecutive quarterand indicating an acceleration in the pace at which vacancies are filled.
 The new contract rent index, the level of new lease rent, rose by 1 point quarter on quarter to 123.
Although the rise has moderated compared to Q3, the index is still on a rising trend. The contract rent
diffusion index, calculated by subtracting the percentage of buildings with a rent decrease from that ofbuildings with a rent increase, remained above zero for the fifteenth consecutive quarter at +23.
 The paying rent index, which is the level of new lease rent and that of existing lease rent combined, wasunchanged from the previous quarter at 91.
 The average free rent months of lease with free rent was 1.5 months, and the ratio of free rent granted
was 51.0%, accounting for a majority, indicating that free rent has become common in the market.
Office Market Report | Tokyo | Q4 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 © 2019 Xymax Corporation. All rights reserved.

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Vacancy
Figure 1: Vacancy Rate

Figure 1 shows the vacancy rate in the Tokyo 23
Wards since 2011. The rate in Q4 2018 dropped 0.30

10%
8%points from Q3 to 1.71%, a record low.

Q2 2012
9.27%

6%Companies are still hiring actively and attempts to
Q4 2018
1.71%

4%
2%

secure office space in preparation for a rise inheadcount are intensifying. More companies areconsolidating multiple offices that are dispersed into0%

an office building with a large typical floor area for

Vacancy Rate

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

2.96%

2.51%

2.28%

2.01%

1.71%

more active communication and better efficiency.
While nearly 40% of companies feel that their office
is too small,*1 some have given up relocating as theyfailed to find vacancies of the desired size andFigure 2: Increase and Decrease in Vacant Space(tsubo)Increase

Decreasechanged the office layout or established a sub-office

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
0instead. We believe the need for relocation or an
increase in floor space will remain high.
*1 Metropolitan Areas Office Demand Survey Autumn 2018,
released December 18, 2018https://www.xymax.co.jp/english/news_research/?type=research

Figure 2 is the increase and decrease of vacant
space. The increase was 165,000 tsubo and thedecrease was 201,000 tsubo. Decrease has exceeded

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Increase

163,000

205,000

184,000

223,000

165,000

Decrease

197,000

256,000

212,000

252,000

201,000

Vacancy (right scale)

2.96%

2.51%

2.28%

2.01%

1.71%

Figure 3: Vacancy Turnover Ratio (4-quarter moving average)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

increase for 16 consecutive quarters since Q1 2015,
resulting in the constant decline in the vacancy rate.
Although there was a supply of a large property in
Q4 2018, it was nearly fully occupied at completiondue to strong demand for office expansion. Formerly
occupied spaces were often filled from within the

Q4 2018
49.7%

building by existing tenants increasing floor space.
Figure 3 shows the vacancy turnover ratio(four-quarter moving average), the ratio of vacant
spaces leased to tenants during the quarter to all thevacant office stock (vacancy at the start of the

Vacancy TurnoverQ4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

38.1%

40.3%

42.8%

46.1%

49.7%

quarter + vacancy added during the quarter). The
ratio in Q4 2018 was 49.7%, a rise for the seventh
consecutive quarter, indicating that vacant spaces
are being taken by tenants at an accelerating pace.

Office Market Report | Tokyo | Q4 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 © 2019 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, theindex of new lease rent levels. The index for Q4 2018

Q2 2008161

160

was 123, a 1-point rise from 122 in Q3. While the riseQ4 2018
123

140

Q1 2010
100

120

100
80

rise of 17 points from Q4 2017, indicating that newrent is still on an upward trend. There is a clear sense

Q2 201276

60

has shrunk compared to that of Q3 (9 points), it is aof scarcity of vacancies in general, regardless of theage, size, and location of buildings, on the back of

New Contract Rent Index

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

106

109

113

122

123

Figure 5: New Contract Rent Index by Size of Building

active relocation for expansion and improvement ofwork efficiency.
Figure 5 indicates the new contract rent index bysize of building. Although the rent for both small &

200
180

medium buildings and large buildings dropped as a160

reaction to the surge in Q3, the rising trend has

140
120

continued over the past year.

100
80
60

Figure 6 is the contract rent diffusion index (DI),Small & Medium (GFA less than 5,000 tsubo)

Large (GFA 5,000 tsubo or more)

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Large Buildings

108

117

116

124

118

Small & Medium Buildings

106

112

115

124

123

which indicates the direction of changes in new leaserents. The DI in Q4 2018 was unchanged from theprevious quarter at +23. The quarter marked thefifteenth consecutive above-zero DI, which means
the number of buildings with a rent increase

Figure 6: Contract Rent DI

exceeded those with a rent decrease. We believe thisRent increased (percentage of buildings) (left scale)
Rent decreased (percentage of buildings) (left scale)to be due to companies’ strong demand for officeContract Rent DI (right scale)

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

Contract Rent DI

Contract Rent DI (four-quarter moving average) (right scale)Q4 2018
23

Q3 200751

Q2 2009
-75

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

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

17

15

22

23

23

space expansion, despite new supply of more than
200,000 tsubo of office buildings in 2018.*2 Although
new supply of approximately 160,000 tsubo isplanned in 2019, many of them have already beenleased up by tenants. It is likely that rents willcontinue to rise due to the scarcity of vacancies.
*2 TOKYO 23 WARDS | Supply of New Office Space 2019, released
December 12, 2018https://www.xymax.co.jp/english/news_research/?type=research

Office Market Report | Tokyo | Q4 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 © 2019 Xymax Corporation. All rights reserved.

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Paying Rent

Figure 7: Paying Rent Index

Figure 7 shows changes in the paying rent index,

120
Q1 2009
105

110

which covers both new lease rents and existing leaserents. The index in Q4 2018 was unchanged from Q3100
Q1 2010100

90

at 91. Since the paying rent index includes ongoingQ4 2018
91

80

rent, its trend is milder than the new contract rent

Q3 201377

70
60

index, which is a timelier reflection of market trends.

Free Rent
Paying Rent Index

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

89

90

91

91

91

Figure 8 indicates the trend of the percentage of
new lease 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 month).
1 day or more (%)

Free Rent Granted(left scale)In Q4 2018, the average free rent month was 3.0

2 months or more (%)

6 months or more (%)

months for leases with free rent, a slight increase of

New lease contracts with free rent (month)

Average Free Rent
(right scale)All new lease contracts (month)

100%

7
6
5
4
3
2
1
0

80%
60%
40%
20%
0%

0.1 months from Q3, and 1.5 months for all newleases, unchanged from Q3.
Although the vacancy rate has dropped in the past
several years and the market has recovered, there is
still a certain amount of long-term and short-term
free rents, unlike in around 2008 before the financial

Ratio ofFree Rent
GrantedAverage
Free Rent
Months

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

1 day +

53.6%

53.8%

55.2%

50.8%

51.0%

2 mon. +

38.4%

40.7%

42.1%

37.5%

35.3%

6 mon. +

6.3%

8.4%

6.7%

4.2%

7.9%

All

1.6

1.7

1.7

1.5

1.5

w/ FR

3.0

3.2

3.1

2.9

3.0

crisis. We believe that free rent has become a custom
in the market to reduce the initial cost of tenants inconsideration of their relocation costs.

Market Cycle
Figure 9 plots the vacancy rate on the horizontal

Figure 9: Market Cycle

axis and the new contract rent index on the vertical

180

axis on a quarterly basis. It shows the cyclicality of

Q2 2008160

the market, with the chart trending to the lower right140

Q4 2018120

in 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

80
Q2 2012

60
0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Vacancy Rate

2.96%

2.51%

2.28%

2.01%

1.71%

New Contract Rent Index

106

109

113

122

123

Note: The vacancy rate before March 2011 is based on data by a major leasing agent.

in 2008 (vacancy up, rent down).
The market entered a recovery phase in 2013, withthe trend continuing in 2018. During Q4 2018, thechart moved to the upper left due to a drop in thevacancy rate and a slight rise in rent.

Office Market Report | Tokyo | Q4 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 © 2019 Xymax Corporation. All rights reserved.

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Reference

Figure 10: Major Building Completions (Q4 2018)
FloorsAbove Ground /Below Ground

Ward

Address

Completion

Total floorarea(tsubo)Marunouchi Nijubashi Building

30/ 4

Chiyoda3-2-3 Marunouchi

2018/1052,651

Sumitomo Fudosan Fukuoka
Hanzomon Building

7/1

Chiyoda1-12-1 Kojimachi

2018/103,531

Tokyu Yotsuya Building

9/2

Chiyoda6-6 Kojimachi

2018/10

3,393

Sumitomo Fudosan Akihabara
North Building

10 / 0Taito

5-2-1 Ueno

2018/11

3,532

Name

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

Figure 11: Major Office Relocations (Q4 2018)
Company
medibaALBERT

From
Shibuya Hikarie
Shibuya Ward

Shinjuku Nomura
Building
Shinjuku Ward

San-ai Oil

To
Sumitomo Fudosan Roppongi Grand
Tower
Shinjuku Front Tower
Shinjuku Ward

Otemachi PLACE East Tower

Shinagawa Ward

Chiyoda Ward

Urbannet Uchisaiwai-cho Building
Minato Ward

Sumitomo
ChemicalTokyo Sumitomo Twin
Building (East)

Sumitomo
Life
Insurance

Kowa Sumisei Tsukiji
Building

Yaesu 2-chome North District Category I
Urban Redevelopment Project A-1 Block

Chuo Ward

Chuo Ward

Chuo Ward

PurposeSize(tsubo)Jan 2019

Betterefficiency

770

Jan 2019

Expansion

511

Apr 2019

Consolidation,betterefficiency883

H2 2019

Betterefficiency

3,630

H2 2021

Betterefficiency

5,000

2022

Betterefficiency

5,600

Minato Ward

Obbli Uni Building

Nippon Light Tennoz Yusen Building
Shinagawa Ward
Metal

Month
Year

Tokyo Nihonbashi Tower
Chuo 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 | Q4 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 © 2019 Xymax Corporation. All rights reserved.

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Survey Overview
Increase and Decreasein Vacant Space

Vacancy Rate

Description

Main Point

Supply and demand balance in the market

Supply and demand balance in the market

All

All

All / Large / Small & Medium

Every Quarter
Data of available vacant spaces andData of available vacant spaces andData of available vacant spaces andData of new contract rents including CAM
buildings. Independently collected by Xymax. buildings. Independently collected by Xymax. buildings. Independently collected by Xymax. charge. Independently collected by Xymax.
33,052 buildings• Vacancy rate
= vacant space ÷ rentable space• Vacant Space
Total available vacant space in completedbuildings as of the time of the research.

How toCalculate

Level of contract rents

Tokyo 23 Wards
All

ReleaseData Used in
Recent Quarter

Supply and demand balance in the market

Office Building

MarketData Source

New Contract Rent Index

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.

SectorBuilding Size

Vacancy Turnover Ratio

Vacant space versus total office stock in themarket.

15,083 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• Rentable Space
new agreement
Rentable space of completed buildings as of b. Space in new completions but lease is
the time of the research.
signed prior to the completionc. Space that had been vacant but the owner
Where rentable space is not available, thedecided not to leaserentable space is estimated from the grossfloor area of the building using the formula
Where rentable space is not available, thedeveloped in the joint study with therentable space is estimated from the grosslaboratory of Professor Naoki Kato at Kyoto floor area of the building using the formula
University Graduate School of Engineering.
developed in the joint study with thelaboratory of Professor Naoki Kato at Kyoto
University Graduate School of Engineering.

Contract Rent DI

15,083 contracts

939 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.).

2) Estimate the quarterly contract rent by• Volume of vacant space leased during theassigning the values of a typical building toquarter: Same as the "decrease in volume of the model developed in the preceding step.
vacant space).
• Initial vacancy: Total volume of completed 3) The New Contract Rent Index is the rent
buildings that are available for lease as of the estimated in the preceding step based on Q1start of the quarter.
2010 as the base point (=100).
• Vacancy added during the quarter: Same as
the "increase in volume of vacant space"
This model shows changes in new contract
rents after removing property-specificvariables.

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

Paying Rent Index

Description

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

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.

Main Point

Direction of contract rent trends

Level of rents paid by tenantsTokyo 23 Wards

MarketBuilding SizeAll

ReleaseData Source
Data Used in
Recent Quarter

How toCalculateMarket trends that are not reflected in contract rents

Office Building

SectorAll

All

Every Quarter
Data of new contract rents including CAM charge.
Independently collected by Xymax.
1,387 contracts

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

Data of new contracts signed for buildings undermanagement by Xymax.

3,798 contracts

241 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• Ratio of Free Rent Granted"rent increase”,
preceding step (the "paying rent") with property-specific
The ratio of contracts with free rent in all the new"no change” orfactors as variables (location, building size, building age,contracts (excl. contracts for expansion within the building“rent decrease”
facilities, date of signing of lease, etc.).
and 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 | Q4 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 © 2019 Xymax Corporation. All rights reserved.

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Appendix
Xymax REI Research Updates (November 2018 – January 2019)
Fact-Finding Study on Real Estate Strategies of Commercial Outlets 2018

November 29, 2018

・ Xymax REI conducted an analysis of the real estate strategies for commercial outlets by operators that operate orcontrol multiple outlets. The report summarizes the details, changes, and issues of operators’ real estate strategies.

Fact-Finding Study on Information Management of Commercial Outlets 2018

November 29, 2018

・ This report summarizes the reality of operators’ information management, including how they actually manage
information and the challenges involved when they formulate and implement real estate strategies of outlets.

Analysis of Length of Occupancy of Office Tenants in Tokyo 23 Wards (2018)

December 7, 2018

・ The estimated average occupancy period of office tenants, including ongoing tenants, was 9.6 years.
・ The estimated percentage of tenants continuing to stay in a building for over two years was 93.8%

TOKYO 23 WARDS | Supply of New Office Space 2019

December 12, 2018

・ The average annual new supply in 2019–2022 is expected to be 138,000 tsubo, falling below 172,000 tsubo, theannual average annual of the past 10 years.

OSAKA CITY | Supply of New Office Space 2019

December 12, 2018

・ The average annual new supply in 2019–2022 is expected to be 9,000 tsubo. This is less than a third of 29,000 tsubo,
the average annual volume of the past 10 years.

Metropolitan Areas Office Demand Survey Autumn 2018

December 18, 2018

・ Since autumn 2016, Xymax REI has been conducting surveys on companies' use of offices and workstyles on asemi-annual basis and has analyzed their relationship between office demand. This report covers the results of thefifth survey.

TOKYO 23 WARDS | Office Stock Pyramid 2019

January 23, 2019・ Office stock at end of 2019 is expected to be 12.81 million tsubo on a rentable area basis, with small &medium-sized buildings and large buildings accounting for roughly the same amount: 6.05 million tsubo (47%) and6.76 million tsubo (53%), respectively.

OSAKA CITY | Office Stock Pyramid 2019
・

January 23, 2019

Office stock at end of 2019 is expected to be 2.79 million tsubo on a rentable area basis, with small &medium-sized buildings and large buildings accounting for roughly the same amount: 1.39 million tsubo and 1.40
million tsubo, respectively.

Please contact below for inquiries on 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 | Q4 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 © 2019 Xymax Corporation. All rights reserved.

7