Tokyo office market overview mid-year 2005
The limited supply of new construction combined with strong demand, resulting in an increasingly strong landords' market, is the most significant theme in the Tokyo office market in 2005.
New office space developments scheduled for completion in Tokyo during 2005 will total approximately 130,000 tsubo (around 4.6 million square feet). This amount of new construction would be considered massive by most cities' standards in today's markets but it is considered limited given Tokyo's past and future levels of new supply. 2003 was a record-breaking year in the city with new construction peaking at approximately 300,000 tsubo (around 10.7 million square feet). 2004 produced a significant new supply of approximately 200,000 tsubo (around 7.1 million square feet). New construction in the coming years will be considerable as well with approximately 230,000 tsubo (around 8.2 million square feet) in 2006 and 200,000 tsubo (around 7.1 million square feet) in 2007 planned for completion.
Premier Class A space in Tokyo's five central wards has spiked
The vacancy rate for Class A space in Tokyo's five central wards has decreased substantially from approximately 8 percent during the Second Quarter 2003 to an extremely tight rate of approximately 4 percent in July 2005. This rate reflects the result of limited new supply as well as strong leasing activity. Much of the leasing demand can be attributed to Japan's robust economy. This year domestic tenants have made up large percent of Tokyo's leasing transactions.
All industries in Tokyo appear to be benefiting from the current local economic climate. However, those that are excelling include the Japanese automotive companies and their suppliers, as well as the pharmaceutical and semiconductor sectors. In addition to the growth of existing tenants, Tokyo is experiencing an expanding tenant base with the arrival of new foreign start-up companies and the formation of new Japanese REITS.
As the vacancy rate tightens, the landlords' market strengthens as evidenced by the spike in rental rates. The average asking rate for new and premier Class A space in Tokyo's five central wards has spiked dramatically from Y30,000-Y40,000 per tsubo per month during the Fourth Quarter 2004 to Y40,000-Y50,000 per tsubo per month. As anticipated in such a landlords' market, landlords are in a position to be very selective and tenants are receiving less flexibility in lease terms and fewer concessions. Landlords are willing to negotiate a maximum of 5 to 10 percent off asking rental rates and free rent periods have been significantly reduced from last year's average.
Going forward, the landlords' market that has fully emerged during the first half of 2005 will continue throughout the year. As large blocks of Class A space are increasingly difficult (or impossible) to find in desired locations, tenants are locking in new space by pre-leasing space in new buildings scheduled for completion in 2006 and 2007.
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