Tokyo | Q2 2019 August 7, 2019 . In the April–June 2019 quarter, the Tokyo 23 Wards’ office market saw a rise in vacancy rate for the first time in 18 quarters as some formerly occupied spaces were not filled from within the building and went on the market, although office space needs remained strong. The rising trend of new contract rent continued. . The vacancy rate* was 0.87%, up 0.06 points from the previous quarter. In terms of the increase and decrease in vacancies,* the increase exceeded the decrease for the first time in 18 quarters, with 63,000 tsubo increasing and 60,000 tsubo decreasing. The vacancy turnover ratio,* the rate of decrease in vacant office stock, dropped 2.9 points from the previous quarter to 50.7%. * The calculation method has been changed from that of the previous quarter. Details are provided at the end of the report. . The new contract rent index , the level of new lease rent, was 127, +4 from the previous quarter. The contract rent diffusion index , calculated by subtracting the percentage of buildings with a new rent decrease from that of buildings with a new rent increase, remained above zero for the seventeenth consecutive quarter at +34. . The paying rent index , which includes new and existing rents, was 96, +2 from the previous quarter. ● The average free rent months of lease with free rent was 1.7 months and ratio of free rent granted was 47.3%, indicating that free rent has become common in the market. Office Market Report | Tokyo | Q2 2019 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. Figure 1: Vacancy Rate (by Area)

Figure 2: Vacancy Rate (by Size)

Figure 3: Increase and Decrease in Vacancies (23 Wards, All Sizes) 7% 5% 4%

Vacancy
Figure 1 is the vacancy rate in Tokyo 23 Wards, five Central Wards (Chuo, Chiyoda, Minato, Shibuya, and Shinjuku Wards), and 18 Peripheral Wards since 2011. The rate in Q2 2019 rose 0.06 points in the 23 Wards to 0.87%, 0.04 points in the five Central Wards to 0.59%, and 0.12 points in the 18 Peripheral Wards to 1.77%. Although companies still have large needs to expand offices,*¹ they are having difficulty expanding even if their headcount has increased and their offices have become small, due to lack of offices of the required size and location. As a result, an increasing number of companies are seeking to solve their office size constraints with work-from- home and telework. This can be considered as a reason why the vacancy rate did not drop. *1 Metropolitan Areas Office Demand Survey Spring 2019, released on June 26, 2019 https://www.xymax.co.jp/english/research/images/pdf/20190626.pdf Figure 2 is the vacancy rate of all buildings, large buildings (gross floor area (GFA): 5,000 tsubo or more), and small & medium buildings (GFA: less than 5,000 tsubo) since 2011. In Q2 2019, the rate rose quarter on quarter in both large and small & medium buildings, at 0.79% and 0.96%, respectively.
Figure 3 is the increase and decrease in
vacancies . The increase was 63,000 tsubo and the decrease was 60,000 tsubo, both all-time lows, in Q2 2019. The increase exceeded the decrease for the first time in 18 quarters. Reasons for the all-time low of increase and decrease in vacancies include the continued strong scarcity of vacancies in the overall market, with the vacancy rate less than 1%, and the small supply of new office building completions in Q2 2019.
Office Market Report | Tokyo | Q2 2019
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.
Figure 4 shows the vacancy turnover ratio (four- quarter moving average), the rate of vacancies leased to tenants during the quarter to all the vacant office stock (vacancies at the start of the quarter + vacancies added during the quarter). Although the ratio in Q2 2019 was 50.7%, down 2.9 points from the previous quarter, the ratio remains high. Vacancy turnover in the office market still seems to be active.
New Contract Rent
Figure 5 is the new contract rent index , the index of new lease rent levels. The index for Q2 2019 was 127, up 4 points from the previous quarter and up 14 points year on year. The rising trend of new rent since Q2 2012 has continued. Large office buildings with good access continue to be popular for purposes such as consolidation of offices for greater work efficiency. Due to the shortage of vacancies in the market, there were cases where the borrower side accepted the lender side's aggressive offer of expensive rent. Figure 6 shows the new contract rent index by size of building . The index for large buildings with a GFA of 5,000 tsubo or more dropped 1 point to 118. The index for small & medium buildings with a GFA of less than 5,000 tsubo rose 3 points from the previous quarter to 125. The rising trend since 2012 has continued in both sizes of buildings.
Office Market Report | Tokyo | Q2 2019
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. Figure 7: Contract Rent Dl
Figure 7 is the contract rent diffusion index (DI) (the percentage of buildings with rent rises minus the percentage of buildings with rent declines), which indicates the direction of changes in new lease rents. The DI in Q2 2019 was +34, up 15 points from the previous quarter. This indicates that there were more buildings with a higher rent than six months ago than those with a lower rent. The DI remained above zero for 17 consecutive quarters.
Paying Rent
Figure 8 shows the paying rent index, which covers both new lease rents and existing lease rents. The index in Q2 2019 was 96, up 2 points from the previous quarter. More lenders are aggressively raising rent upon renewal of contract on the back of a shortage in vacancies in the market and a rise in new rent. Borrowers also tend to accept a certain degree of rent rise negotiations since there are limited options for relocation and the rent of offices after relocation is also high. This is thought to have led to the rise in the paying rent index.
Free Rent
Figure 9 indicates the percentage of new lease contracts with free rent to all new lease contracts (ratio of free rent granted) and the average free rent period (average free rent months). In Q2 2019, the average free rent months were 3.5 months for leases with free rent, a slight increase of 0.3 months from Q1 2019, and 1.7 months for all new leases, an increase of 0.2 months from the previous quarter. As in Q1 2019, there is a certain amount of free rent, both long-term and short-term, indicating that the custom of granting free rent has spread across the market. As rent levels have also continued to rise, relatively long-term free rent is also granted in some cases as a result of negotiations.
Office Market Report | Tokyo | Q2 2019
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. Figure 10: Market Gycle

Market Cycle
Figure 10 plots the vacancy rate on the horizontal axis and the new contract rent index on the vertical axis on a quarterly basis. It shows the cyclicality of the market, with the chart trending to the lower right in 2001 (vacancy up, rent down), remaining static in 2003–2004, then trending to the upper left in 2005 (vacancy down, rent up) and to the lower right again in 2008 (vacancy up, rent down). The office rental market entered a recovery phase in 2013, with the trend continuing in Q1 2019. During Q2 2019, the chart moved to the upper right due to rises in both vacancy rate and rent.
Changes in the calculation method related to the vacancy rate
In order to better reflect the supply and demand balance of the office market in vacancy-related indicators (vacancy rate, increase and decrease in vacancies, vacancy turnover ratio), we reviewed the criteria for the targets of calculation and carried out a recalculation, including past data. We will apply the changes starting from Office Market Report Tokyo Q1 2019, released on May 8, 2019, but will not replace the reports we have released in the past. The data that we have recalculated retrospectively can be found in our website (please refer to the URL below). Those who are using the time series data for the vacancy rate, increase and decrease in vacancies, vacancy turnover ratio, and market cycle (Figures 1–4 and 10) are requested to replace the data. * The data after the changes can be found below. https://soken.xymax.co.jp/wp-content/uploads/2019/07/1908-office_market_report_g2_2019_data.xlsx Office Market Report | Tokyo | Q2 2019 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.
The sizes of office space are estimates.
Office Market Report | Tokyo | Q2 2019
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.

Office Market Report | Tokyo | Q2 2019
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.
Energy Consumption and Energy Cost in Office Buildings May 15, 2019 This report is a summary of the results of a survey of energy consumption and energy cost in office buildings in the Greater Tokyo area. Effect of Commuting Stress on the Working People's Satisfaction June 4, 2019 This report is a summary of the results of a survey of the effect of commuting stress on office workers, with a focus on the reality of commute of workers in the Greater Tokyo area. Metropolitan Areas Office Demand Survey Spring 2019    June 26, 2019 This report is a summary of the results of a continuous analysis of the relationship between office demand and the actual state of companies' office use and workstyles, on which we conduct a questionnaire survey biannually.
Office Market Report | Tokyo | Q2 2019 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.