Regional Japanese Office Markets - August 2020

HIGH-GRADE OFFICES ¹

Amid the ongoing global pandemic, the pace of high-grade rental growth has expectedly slowed. Yet, the fact that growth is continuing at all provides some comfort, at least for now. Though the tenant profile found in this segment is better equipped to endure, the uncertainty surrounding the longevity of the outbreak remains a key concern. 

To be sure, airtight vacancy rates across all major regions and sound office demand, backed by healthy corporate profits, have been significant factors behind the steady rental growth up to this point. That said, rates have unsurprisingly started to creep up lately, including in the capital.

Despite this slight uptick, the vacancy rate in Fukuoka remains extremely tight at 0.3% — the lowest amongst the major regions. Elsewhere, having had close to no vacancy last period, Nagoya saw the most change this time around, with rates rising to 0.8% (Graph 1).

As for rents, growth was strongest in Fukuoka in 1H/2020. Meanwhile, with growth in Osaka lagging behind its peers, the spread in high-grade rents compared to Tokyo widened. Office rents in the capital are now almost 64% higher following a 1.8 percentage point (ppts) expansion.

ALL-GRADE OFFICES ²

Much like its high-grade counterpart, the allgrade market continues to be underpinned by tight supply, albeit not to the same extent. In contrast to the broader market, vacancy rates in Sapporo experienced a slight year-on-year (YoY) tightening of 0.3ppts and, as a result, the city has the lowest rate amongst the regions at 2.0%.

Likewise, the momentum in rental growth has continued this period. Unlike the higher-grade segment, however, the pace has quickened in all but Sapporo. Growth in Fukuoka was particularly impressive at 7.0% YoY. Sendai, however, lagged with rents rising by only 2.0% YoY.

The disparity in rents compared to the capital was more pronounced in the all-grade market in 1H/2020. Specifically, rents in Tokyo stand at a 90% premium to the next most expensive, Osaka.