Also companies in bankruptcy are downgrading their offices to lower grade buildings in less prominent locations, says a new report into the Tokyo and Osaka markets from international consultants DTZ.
Vacancy for Tokyo Grade A offices fell to 6.73%, a fall of 1.54% from the previous quarter. It is the first time in 19 quarters since the second three months of 2004 that it has gone over 6% and the report describes the situation as 'serious'.
'It was obvious that the severe economic situation of the past year rapidly cast a shadow on the market as the vacancy a year ago was low at 2%,' the report said.
Rentals declined further by 4.7% in the first quarter of 2009 from the last quarter of 2008. It has now dropped significantly by 16% from the peak of rentals recorded at the end of 2007. As the gap between asking rent and achievable rent is expanding, the real rent acquired by landlords should be much lower, the report said.
The Osaka office market stayed gloomy during the first three months of 2009, again due to weakening corporate demand. With an increasing amount of new supply, it became difficult to fill the vacancies both in existing and new buildings. Vacancy for Grade A offices was 5.38%, up by 1.09% from the previous quarter, the first time that rates went beyond 5% since 2005.
In Osaka rentals declined by 0.2% quarter-on-quarter and by 1.3% year-on-year. Analysts found that although completions in this quarter succeeded in acquiring tenants, the situation has become more difficult and it is expected that there will be more new buildings with vacancies in coming months.
The report also says that the real estate investment market remained quiet at the beginning of 2009. However, anecdotal evidence suggest that there were increased purchasing activities among corporate as well as high net worth individuals looking at small sized properties who have found the current situation attractive as the market cools down with limited number of players.
Foreign property investors are still keeping a 'wait and see' position, the report says, but adds; 'Many core players are looking at Japan as a strategic destination, recognizing the existing opportunities under the current market condition. The bottleneck is the difficulty in finding fair value, given the limited number of transactions in the market'.
'The environment surrounding the real estate market remains challenging both inside and outside of Japan given the deteriorating global economy. However, the interest from foreign investors seeking the opportunities in Japan when the market turns around remains strong. We expect that such investors may take action towards the end of 2009,' said Yoshiki Kaneko, CEO of DTZ in Japan.
