Net absorption is positive for four straight quarters

• According to the December Tankan survey for Greater Osaka, the sentiment of large manufacturers increased by 1 point to 11, improving for the second consecutive quarter. The sentiment among large non-manufacturers increased by 9 points to 19, improving for the tenth consecutive quarter. 
• Net absorption totalled 5,000 sqm in 4Q22. While there was secondary vacancy derived from the relocation of large companies to new buildings, net absorption remained positive due to the active tenant movement. KPMG Japan Group moved to the Nippon Life Yodoyabashi Building during the quarter. 

Vacancy rate declines to 3.2%

• No new supply entered the market in 4Q22. For the full-year 2022, new supply totalled 130,000 sqm, increasing total stock by 7% y-o-y.
• The vacancy rate stood at 3.2% in 4Q22, decreasing 20 bps q-o-q and increasing 10 bps y-o-y. While some buildings saw secondary vacancy, many existing buildings backfilled vacancy, resulting in a slight q-o-q decrease in the vacancy rate. 

Rents continue to decline while cap rates remain flat

• Gross rents averaged JPY 22,467 per tsubo, per month, at end-4Q22, decreasing 0.9% q-o-q and 3.3% y-o-y. While the vacancy rate has declined for three consecutive quarters, rents continued to drop in anticipation of a further rent fall due to a large supply influx expected from 2024 onwards.
• Capital values decreased 1.4% q-o-q and 5.1% y-o-y in 4Q22. The decrease reflected the rent declines. Cap rates were flat. There were no transactions for Grade A office buildings during the quarter.

Outlook: Rents to continue slight decline while cap rates to remain flat

• According to the Oxford Economics forecast as of December 2022, Osaka’s real GDP is forecast to grow by 1.4% in 2022 and 0.5% in 2023. Downside risks include concerns about the deterioration of the domestic economy. The BOJ effectively increased interest rates, but the impact on the real estate market is expected to be limited for the foreseeable future.
• As new supply should remain limited in 2023, a moderate rise in vacancy rates and a moderate decline in rents are expected. Investors are taking a cautious stance as rents continue to fall, but there is no significant change in investment appetite and cap rates are expected to remain almost flat.