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Regional Japanese Office Markets - November 2019

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Regional rental growth remains robust, albeit moderating

HIGH-GRADE OFFICES 1

The pace of high-grade rental growth has been strong, though it has moderated compared to the previous period. Rental growth, nonetheless, remains buttressed by extremely tight vacancy rates. That said, top rents may soon start to test the financial limits of tenants.

Each of the three major regions have airtight vacancy rates, with some having close to no availability at all. Osaka has witnessed the greatest tightening this period, falling 0.6 percentage points (ppts) year-on-year (YoY) to 0.2%. Rates in Nagoya remained fairly unchanged, though this is not surprising given vacancy has been below 0.5% since 1H/2018. Fukuoka follows a similar trend, with vacancy holding firm at 0.1% this year (Graph 1).

High-grade rental growth in Tokyo no longer lags its regional counterparts, outpacing Fukuoka in 2H/2019. In fact, Tokyo was the sole market to experience higher YoY growth compared to the previous period. As a result, the spread between the top performer, namely Osaka, is narrowing.

Map 1

GRAPH 1 | High-grade Office Performance, 2H/2019

ALL-GRADE OFFICES 2

Underpinned by tight vacancy rates, rents in most regions have surpassed previous peaks seen in 2008. Osaka and Sendai are the exceptions, though both are not far off. The relative affordability of this market, given the spread in rents versus the high-grade market, suggests there may be some room for further growth. 

As of September, apart from Sendai, average vacancy rates across the regions sit below 2.5%. In Sendai, the vacancy rate lies just above 4% – the lowest level recorded since 1992.

Given the current low levels of vacancy experienced in the submarkets, it is perhaps unsurprising that the pace of tightening has slowed, and in some regions, rates have somewhat loosened YoY – Sapporo being case in point. Regardless, the tight market conditions across the regions has fed through to rental growth. As of September, all regions experienced a pick-up in rents over the year, perhaps spurred by more expensive rents in the high-grade office market. Fukuoka maintains the top spot, growing 5.2% YoY. Nagoya, however, saw the greatest change, with growth doubling to 4.0% YoY compared to September 2018. In contrast, having consistently exceeded 1% of YoY growth since September 2018, rental growth in Sendai has fallen just below that level a year later. 

Map 1

GRAPH 2 | All-grade Office Performance, 2H/2019

Most regional office markets have demonstrated strong rental growth driven by extremely tight market conditions. This trend should continue going forward, though the rate of growth could slow.

Savills Research & Consultancy
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