Regional Japanese office outperforming Tokyo

High-grade offices in selected cities are outperforming the Tokyo office market, according to Savills. Cities such as Osaka, Nagoya and Fukuoka have performed well and their growth pace has exceeded that of Tokyo.

Fukuoka improved its already tight vacancy by 1 percentage point to an impressive 0.4 percent, and rents have grown 8.8 percent year-over-year. Osaka has seen the largest vacancy tightening as Grand Front Osaka now operates at full capacity. Nagoya maintained tight vacancy despite consecutive openings of station front buildings. New high-quality offices have helped increase average rents.

According to a semiannual survey by the Japan Real Estate Institute, regional cap rates have been compressing in most cities. Regional cities are still showing attractive yield gaps of 1 percentage point to 2 percentage points over Tokyo, but actual market yield gaps have been tighter.

And according to Real Capital Analytics, Tokyo’s share of Japan’s real estate transactions fell to just 42 percent during the first half of 2017. Major suburban areas such as Yokohama and Saitama have seen higher volumes, which have resulted in a larger share of transactions recorded outside of major cities.

Total transaction volumes reported in Osaka, Nagoya, Fukuoka, Sendai and Sapporo totaled ¥280 billion ($2.5 billion), or 48 percent of volumes in Japan. This is a 5.6 percentage point increase from the previous year.

Investors are increasingly searching for opportunities outside the capital city.