Japan’s second largest office market is performing well. The Osaka Grade A office rent in 4Q17 was JPY 18,799 (US$166) per tsubo per month, a growth rate of 7.6 per cent year-on-year.
Meanwhile, Tokyo’s Grade A office rent was JPY 36,733 (US$325) per tsubo per month, a mere 1.4 per cent growth year-on-year, despite Tokyo’s active rental market. This means that Osaka’s outstanding market recovery has surpassed Tokyo’s.
The vacancy rate in Tokyo was 2.5 per cent as of end-2017, and the momentum for rent growth is continuing. In addition, the pre-commitment rate for Grade A office space completing in 2018 has reached 80 per cent with consistent demand.
Osaka: Rent growth exceeds 7 per cent
Limited new supply of Grade A office space in Osaka meant that its rental growth exceeded that of Tokyo’s. There was no new supply of Osaka Grade A office space in 2016. Although there was 103,000 square metres of new supply in 2017, both Nakanoshima Festival Tower West and K-Opticom Building completed with full occupancy levels.
Major project completions from 2018 onwards include Namba Sky O in September 2018 and Orbic Midosuji Building in January 2020. The Umeda 1-1 Project is scheduled for completion in the spring of 2022.
JLL forecasts that the vacancy rate of Osaka Grade A office space will remain below two per cent and the average rent will reach JPY 23,500 (US$208) per tsubo per month in 2022. In addition, Grand Front Osaka, completed in 2013, has finally reached full occupancy levels; indicating that price competition has come to an end.
Second thoughts on new supply
However, Osaka experienced market fatigue when there was an oversupply in the past. When Grand Front Osaka, a large complex building, opened in 2013, a new record of about 170,000 square metres was newly supplied. This corresponded to about 12 per cent of total stock of Grade A office space at that time, with a subsequent rise in vacancy.
This development project was planned before the global financial crisis, and because its completion coincided with the economic downturn, the vacancy rate exceeded 10 per cent in 2013 and the average market rent slumped to JPY 15,000 (US$133) per tsubo per month.
Figure 1: Osaka Grade-A Supply and Demand
Source: JLL Research
New supply continues to tighten
The mass supply issue witnessed in 2013 remains deeply rooted. As Grade A office developments take several years to complete, new supply will be limited in the future, and rents will likely increase further.
These market conditions will create the best timing for investors to achieve capital gain on properties acquired at the time of the economic downturn around 2010, and buyers can expect an increase in income.
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