Spotlight Tokyo office supply through 2020 - June 2018 Savills World Research Japan
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Savills World Research
Japan
Spotlight
Tokyo office supply
through 2020 June 2018
savills.co.jp/research
Spotlight | Tokyo office supply through 2020 June 2018
Savills World Research
Spotlight
Japan
Spotlight
Tokyo office supply
through 2020 June 2018
Tokyo office supply
through 2020 savills.com.jp/research
“Central Tokyo is expected to witness elevated
levels of high-quality supply between now and SUMMARY
2020. Fortunately for landlords, strong corporate
profits, a tight labour market and an increased By 2020, Tokyo’s central five wards (C5W)
are expected to add over 630,000 tsubo GFA of
focus on consolidating office space to improve rentable office space, increasing total stock by
collaboration and productivity are driving tenants approximately 9% excluding demolitions.
to demand larger, higher quality assets in core 70% of the new supply is located in three
locations. We therefore believe that robust pre- submarkets: Marunouchi & Otemachi (37%),
Shinagawa & Shibaura (19%), and Toranomon,
leasing activity and extremely tight vacancy Roppongi & Akasaka (14%).
levels should keep the high quality sector in
While landlords remain somewhat cautious of
balance, while secondary vacancy could soften such a large volume of new supply, completions
rents for existing stock that does not meet so far in 2018 are enjoying robust occupancy
levels and an encouraging share of upcoming
emerging demand in certain submarkets. The completions has already been pre-leased.
strength of tenant demand will play a vital part in The strength of the economy and landlords’
market dynamics over the next few years, as will management of secondary vacancy is expected to
determine support levels for overall market rents
landlords’ management of their portfolios.” over the next few years.
New completions are expected to achieve
High supply levels ahead Supply is concentrated in certain
rents at the upper end of current market levels and
A series of rapid, large-scale areas - three submarkets account
rents are expected to rise in 2018 before softening
completions from 2018 through to for 70% of the total increase -
Otemachi & Marunouchi in Chiyoda, moderately.
2020 are expected to add significant
supply to central Tokyo’s office Shinagawa & Shibaura in Minato, and
Toranomon, Roppongi & Akasaka We forecast average vacancy will remain tight
market. Given long lead times for
in Minato, and is mostly large floor in 2018 then rise slowly afterwards.
developments it is unsurprising to
see little change in the overall supply plate, high NRA buildings: across
all of the C5W, projects over 10,000 Infrastructure and transport improvements
picture, though our forecast for 2020
tsubo NRA account for 70% of and mixed-use developments will increase Tokyo’s
supply has increased while that
supply. regional/global competitiveness, as mentioned in
for 2019 has shrunk slightly due to
greater clarity on completion times our “Beyond Tokyo 2020” report.
and delays in certain projects. While It is worth noting that the projected
many projects are also planned for annual increase in C5W supply as a Developments are expected to improve long
beyond 2020, risks to the supply- percentage of existing stock is within term growth and have the potential to move Tokyo’s
demand balance lie more in the short the long term average for three of the centre of gravity to new areas, as discussed in our
term so we will focus our analysis five central wards, as shown in Graph “A Gravitational Shift to Shibuya” report.
there. 1, while Chiyoda and Shibuya will see
extraordinary supply by this measure.
Approximately 210,000 tsubo1 Net There is strong demand for space
Rentable Area (NRA) is expected in Chiyoda which should limit the
on average per year between 2018 impact on average vacancy. Shibuya
and 2020, greater than the annual has been undersupplied in the past
average since 2000 of 190,000 tsubo, and is likely to absorb supply more
though demolitions in preparation for easily than this metric suggests. In
redevelopments during this period fact, a large proportion of oncoming
will moderate the net increase. supply in Shibuya has been pre-
leased.
1 1 tsubo = 3.305785 sq m
savills.co.jp/research 02
Spotlight | Tokyo office supply through 2020 June 2018
Submarket dynamics GRAPH 1
Marunouchi & Otemachi will see Annual GFA supply* as % of prior year’s stock,
four large completions in 2018 and excluding demolitions, 2018 – 2020
three in 2020, though this is nothing
new. Mitsubishi Estate is a prominent 8%
2018 2019 2020 Avg since 1991
developer in the area and has been
adding fresh stock over the last two 7%
decades: they are now on what
6%
they refer to as their “third wave”
of construction since 1998. Early
% of prior year's stock
5%
take-up of new supply has been
strong and secondary vacancy should 4%
be mitigated by the submarket’s
3%
convenient location and prestige:
relatively affordable rents at around the 2%
mid 30,000 yen per tsubo per month
level should attract sufficient tenants. 1%
0%
Shinagawa & Shibaura will see Chiyoda Chuo Minato Shinjuku Shibuya
the completion of the South msb
Source: Savills Research & Consultancy
Tamachi Tower in 2018, then a pause * For the purposes of this report except where specified, “supply” refers to upcoming office NRA in the central
for breath in 2019 before the North five wards with a floor plate of 100+ tsubo. Actual office use NRA is used when possible; for projects that have
msb Tamachi Tower and Takeshiba A only published GFA, NRA is estimated at 60% of GFA. For projects that have not specified the proportion
of office use, the whole building is assumed to be for office use. Most large mixed-use developments have
Towers complete in 2020. The area is disclosed the breakdown. Actual NRA may differ from this estimate.
well connected with multiple stations
on the Yamanote loop line, rents are
GRAPH 2
relatively affordable, and it is one of
the few areas with availability of large Supply by submarket (thousand tsubo NRA), 2018 –
floor plates. This year we have already 2020
seen Shiseido agree to move their 2018 2019 2020
headquarters from the Shiodome
Marunouchi & Otemachi
Tower to the Hamamatsucho Crea
Tower, due to complete in August
Shinagawa & Shibaura
2018.
Toranomon, Roppongi & Akasaka
Toranomon, Roppongi & Akasaka
has two large projects due in 2019: Nihonbashi & Yaesu
Toranomon 2-10 (on the site of the
Shibuya & Ebisu
iconic Okura Hotel) and Toranomon
Hills Business Tower. Aside from these,
Shinjuku
Toranomon expects the completion
of the multi-building Azabudai Akihabara & Iidabashi
redevelopment project redevelopment
project, which includes transport 0 50 100 150 200 250
infrastructure such as a brand new Thousand Tsubo NRA
metro station connected to a major
Source: Savills Research & Consultancy
commuter line and plans for new
bus transit routes, which will fuel
to complete in 2025. All of these and vacancy should remain close to
growth for years to come. The area
developments are led by Mitsui current levels. Google’s relocation
is well connected and its proximity to
Fudosan which should reduce the risk from Roppongi to Shibuya Stream
the CBD and to Haneda Airport has
of specific vacancy as Mitsui has a shows the area is very much in
helped office rents start to approach
large tenant base. demand.
levels seen in Otemachi through
strong demand.
Shibuya & Ebisu will see over 60,000 Shinjuku has very little expected
tsubo NRA in 2019. Compared to supply. Just two buildings over
Nihonbashi & Yaesu will see the
other submarkets this is relatively little 10,000 tsubo are being constructed,
Takashimaya Mitsui Building complete but is much more than the annual with the grand total supply expected
in 2018 and the Muromachi 3 average supply to the area since 1990. by 2021 reaching just over 30,000
A project in 2019. Two large However, as a result of this reduced tsubo NRA. Stock in this submarket
development projects in Yaesu 2 supply in the past, there is significant continues to age and rents lower
chome are due in 2022 and 2023 and unmet demand for Shibuya office than the C5W average reflect this.
the 70,000 tsubo NRA multi-building space that has shifted to nearby Occupancy is extremely tight in
Nihonbashi 1 chome central district areas. New oncoming supply is highly Shinjuku, so any tenant migration is
redevelopment project is expected likely to meet this pent-up demand unlikely to affect rents.
savills.co.jp/research 03
Spotlight | Tokyo office supply through 2020 June 2018
TABLE 1
Large scale office completions between 2018 and 2020
Submarket / Year Building name GFA (Tsubo)
Marunouchi & Otemachi
2018 Otemachi Place West Tower 61,100
2020 Marunouchi 1-3 project 49,100
2020 OH 1 B Tower 43,400
2018 Midtown Hibiya 42,500
2018 Marunouchi Nijubashi 38,600
2018 Otemachi Place East Tower 37,400
2020 OH 1 A Tower 36,900
Shinagawa & Shibaura
2020 Takeshiba A Tower 44,500
2020 msb Tamachi Station N Tower 36,600
2018 msb Tamachi Station S Tower 34,900
Toranomon, Akasaka & Roppongi
2020 Tokyo World Gate 32,600
2019 Toranomon Hills Business Tower 28,700
2020 Yotsuya Station Front 17,800
Nihonbashi & Yaesu
2019 Muromachi 3 A 39,100
2018 Takashimaya Mitsui 30,800
Shibuya & Ebisu
2019 Shibuya Scramble East Tower 37,300
2018 Shibuya Stream 22,200
Source: Savills Research & Consultancy, press releases
Rent and vacancy GRAPH 3
forecast Tokyo C5W rent, vacancy and supply relationship,
Savills Research & Consultancy 2001–2021F
forecasts office rents in Graph 3 as
Rent Forecast rent Vacancy Forecast vacancy
primarily a function of GDP growth
60,000 12%
and expected vacancy rates as well
JPY / tsubo / month
10%
as other variables such as demand for 50,000 8%
workers and risk appetite represented
Vacancy
6%
by capital market movements. All 40,000
4%
variables have demonstrated strong
2%
statistical relationships with office 30,000
rental movements over the past 15 0%
years. Using these inputs, we expect 20,000 -2%
450
average office rents to increase slightly Supply
400
Thousand tsubo NRA
until 2019 but then soften. 350
300
We have considered the government’s 250
200
plan to increase the national 150
consumption tax rate from 8% to 10% 100
in 2019 and conclude it is likely to have 50
a smaller impact than the previous 0
hike. While the tax raise in 2014
significantly slowed down economic Source: Savills Research & Consultancy
conditions, the upcoming increase
is only a 25% proportional increase
view appears to be shared by other Although it is more difficult to predict
as opposed to a 60% proportional market participants as, according to than supply, a forecast of rents and
increase in 2014 and only 2% in a recent Japan Real Estate Institute vacancies would be incomplete
absolute terms as opposed to 3%. (JREI) survey for instance, rents for
Furthermore, the government has without considering demand. A
Grade A office buildings throughout
proposed counter policies to combat the C5W are expected to rise steadily stronger yen may dampen exporter’s
the initial effects of the increase. Our over the next ten years. profits somewhat but we have seen
savills.co.jp/research 04Spotlight | Tokyo office supply through 2020 June 2018
corporate profits steadily rise and GRAPH 4
the labour market continue to tighten Office stock in the 23W by size and age, Dec 2017
since 2012 which should support
occupancy. Previously unheard of Small scale* stock Large scale+ stock
price hikes and signs of meagre but
symbolic wage increases also hint at
increased demand from increasingly
0 - 19 yrs 35+ years
profitable corporations. 18% 18%
35+ years
26%
There is significant demand from
tenants for larger floor plates to foster
collaboration among employees and 0 - 19 yrs
50%
for high-specification buildings to
attract and retain talent. With market 20 - 35 yrs
vacancy at extremely low levels there 32%
has been little opportunity for firms to 20 - 35 yrs
meet these demands through existing 56%
stock, which has spurred strong pre-
leasing activity for new completions. * GFA 300-5,000 tsubo +
GFA 5,000+ tsubo
This suggests primary vacancy will
remain low but may raise the risk of Source: Xymax Real Estate Institute
secondary vacancy in older, smaller
buildings. Older buildings with larger GRAPH 5
floor plates or those in convenient Grade A vacancy rates in the C5W, 2009 – Q1/2018
locations that undergo renovation
will still be able to cater for changing
Chiyoda Chuo Minato Shinjuku Shibuya C5W Grade A vacancy rate
tenant demands so are less at risk.
20%
Due to the
completion of
A 2017 survey by Xymax Real Estate Shinjuku Eastside
Institute (“Xymax”) revealed that a Square
large proportion of landlords of small 15%
offices have just one or two buildings
in their portfolios. With limited budgets
% Vacancy
they are likely to be unable to renovate 10%
their properties which could expose
Due to the
this segment of the market to reduced completion
demand and the prospect of lower 5%
of Kyobashi
Edogrand
attainable rents. Another feature of
these older, smaller buildings may
balance out large supply. Xymax 0%
estimated in 2017 that 26% of small- Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q3Q4Q1Q2Q4Q1
scale stock in the 23 wards was more 09 2010 2011 2012 2013 2014 2015 2016 2017 18
than 35 years old in Graph 4. Reduced Source: Savills Research & Consultancy
stock as a result of demolitions could
balance out weaker demand. of Toranomon Hills in 2014 has created with an entirely new metro station on
a new market and had an impact on Tokyo’s Hibiya Line. In addition, a rapid
Graph 5 shows historical vacancy in nearby house prices, office rents, and transit bus system is expected to
Grade A office buildings by submarket. land prices as people have begun to be fully operational by March 2021
A large number of completions can take advantage of the new facilities. that will further improve transport
affect vacancy levels in individual Similarly, Shinagawa has grown in infrastructure. The area is within
submarkets, negatively impacting popularity since the Shinkansen was easy reach of Haneda Airport and
market sentiment through advertising connected in 2003. Many large office is central enough to facilitate easy
effects as happened with Eastside buildings sprang up around the station onward travel to other major districts,
Square in 2012. If this were to happen area at the same time and it has making it ideal for office workers,
with a few large buildings in the current emerged as a new office district in its residents and business travellers
supply cycle it could wrongly create own right. alike. The addition of brand new
a perception that vacancy levels are Shinkansen maglev technology
rising across the whole submarket. Where can we expect good news as well as a new JR rail station in
over the next few years? Shibuya is Shinagawa will serve to increase
The long view set for a refresh as covered in our that district’s popularity even further.
Though high supply levels may disrupt spotlight report of November 2017 For a more in-depth analysis of
an office market in the short term, – “A Gravitational Shift to Shibuya”. infrastructure development in Tokyo,
the long term fundamental impact of Toranomon can also arguably expect we refer you to our recent report
redevelopment projects is generally more growth as planned supply in “Beyond Tokyo 2020: Prospects for
positive. For instance, the completion this area continues out to 2022 along the Japanese Real Estate Market”.
savills.co.jp/research 05Spotlight | Tokyo office supply through 2020 June 2018
OUTLOOK
The prospects for the market
"Tokyo's CBD is in the middle It might be also the case that Rental growth has been slow since
of a multi-year period period of continued strong demand from robust the Crisis which should provide
raised supply amid record low corporate profits may lead to steady some downside protection and the
vacancy levels and we believe that absorption without the need for concentration of new developments
the volume of new builds coming large corrections in rents. Japanese implies that their impact should differ
online through 2020 will soften corporations’ profitability has improved across submarkets. Over the longer
rents and occupancy rates at least significantly since the Crisis and firms term, the high quality and mixed-use
temporarily. The global business have diversified revenues through nature of upcoming supply alongside
cycle, including Japan’s, looks international expansion. This strong the completion of new transport
extended and we cannot discount corporate activity has meant that office infrastructure should bring new
the possibility of a correction. market prospects are much brighter, energy to surrounding areas, proving
Uncertainty surrounding the for instance, than they were in late positive for a variety of real estate
possibility of trade wars, political 2016 and early 2017. We expect that sectors, not just the office market.
upheaval in Europe, or a crisis new builds in the C5W are likely to
in the Middle East or Asia may be steadily taken up, possibly at the
disrupt the economic cycle, expense of older buildings that are
leading to a change in the outlook unlikely to be renovated to current
for the real estate market. standards.
Please contact us for further information
Savills Japan Savills Research
Christian Mancini Tetsuya Kaneko Simon Smith
CEO, Asia Pacific Director, Head of Research Senior Director
(excl. Greater China) & Consultancy, Japan Asia Pacific
+81 3 6777 5150 +81 3 6777 5192 +852 2842 4573
cmancini@savills.co.jp tkaneko@savills.co.jp ssmith@savills.com.hk
Savills plc
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