jokomsharma: Japan Office Market Review ? Real Estate Japan

Vacancy Rates Decline Nationwide as Demand Spreads to a Wider Range of Buildings; Rents Rising Primarily Among Large Buildings in Select Cities and Areas

ECONOMIC CONDITIONS

As the Europeon economic slowdown and?worsening tensions contribute to a weakening of exports, the GDP growth rate for the fourth quarter of 2012 is expected to show a decline of 0.2 points quarter-on-quarter (q-o-q) to 0.3%, According to the Bank of Japan, the Tankan Large Manufacturing Enterprise Diffusion Index (DI) 9 paints from the previous survey period To -12 points. However, the forecast DI is expected to recover by 2 points. Going forward, economic conditions are expected to recover gradually from the current downturn as there are hopes that the change in government will have a favorable?economic impact. Furthermore, domestic demand continue to be supported by recovery measures trom the Great East Japan Earthquake in 2011 and effects from the previous emergency economic stimulus packages. Demand from overseas can also be anticipated to increase as emerging economies?recover.

DEMAND

Demand in Osaka is currently being driven and?absorbed by a new, large-scale building. In Tokyo, however, demand was seen to have spread io mid-scale and smaller buildings, while large sca|e relocat?ons seem to have run their course, Demand for upgrades in the location and quality ot buildings have been firming up nationwide. Scattered cases of?companies relocating to take more space have?been observed, as well as relocations away?from aging company-owned buildings with the?result being an increase in occupied floor?space. Available space in prime buildings?which meets tenants requirements (i.e. BCP?planning, earthquake resistance) is becoming?scarce in many cities, and in cities such as Fukuoka and Yokohama, demand has spread to buildings that are relatively further away from?train stations, or older buildings with?competitive rents that previously struggled to?find tenants. There are concerns of demand?becoming restrained with the lack of prime?buildings that tenants seek in regional cities?such as Sapporo, Hiroshima, or in Saitama?where supply is already tight.

NEW SUPPLY/VACANCY RATES

The Grade A vacancy rate in Tokyo fell 0.5?points to 8.8% as a new Grade A building was completed at almost full occupancy. The vacancy rate For Tokyo?s 23 Wards, however, remained flat at 7.5%. The Grade A vacancy rate in Osaka declined by 2.9 paints io 8.7%, improving significantly after a landmark Grade A was compieted this quarter at high occupancy. The vacancy rate of the overall city was down by 0.4 points In Nagoya, where?no new Grade A buildings have been completed in the last three years, the Grade A?vacancy rate dropped by 0.9 point to 18%, reflecting the?tight supply. The overall vacancy rate also fell by 0.1 points.?In other regional cities where supply has been limited, demand is?being concentrated in the city center areas. Saitama and Kobe led?the way as the vacancy rate throughout the country improves, with?Saitama dropping 1.5 points and Kobe dropping by 1.4?points Saitama?s vacancy rate at 4.1% is now the lowest in?the notion.

RENT

The Grade A assumed achievable rent in Osaka increased?marginally, while in Nagoya and Tokyo they were flat. Average asking rents are slightly weakening in some including Kyoto, which increased last quarter, and Sendai. On the other hand, Kobe recorded its second consecutive increase, with Sapporo, Saitama and Hiroshima following with overall average asking rents varying from flat to slightly increasing.

TOKYO

TOKYO GRADE A BUILDINGS

Vacancy rates decline for two consecutive quarters after peaking in?Q2/2012

The Grade A vacancy rate in Q4/2012 tell 0.5 points to 8.8%. While the quantity of new supply has been relatively low, the completion ol a Grade A building at almost full occupancy, and scattered cases ot large relocations mostly at newer existing buildings seems to have contributed to the improved vacancy Nihonbashi and?other areas are seeing very tight supply with the vacancy rate below?1%.

Rents down slightly

Average assumed achievable rent fell 03% to per tsubo,?showing virtually no change in The borlom?ng of rental levels since the beginning of the year. Although vacancy rares have declined after?overcoming the mass of new supply during the first half of the year, the market still lacks the strength to push rental up. There were cases where rents were pulled up in some buildings due to their favorable location and high specifications. However, the opposite?case was also observed, and the market overall is seeing flat rents.

Despite weak demand, positive?minded relocation have increased;?rents at turning point

New demand this quarter was approximately 19,000 tsubo, down?16% Foreign relations disputes, the continuing strong yen, and the uncertain global economic forecast withered the corporate mindset, which led to the drop in demand. While some relocations related to cost-cutting and operational consolidations continue to be observed, cases of corporate relocotions to expand operations, and improve the location and specs ot the buildings have been increasingly observed. Despite the lack of a single industry leading corporate relocations, a wide range of domestic and foreign manufacturing, financial and IT companies led relocations in the fourth quarter. Although new supply during the quarter consisted of o single building in the Otemachi area, a relatively large amount of supply consisting of approximately 57,000 tsubo is expected to be coming into the market in Q1/2013. Pre-leasing activities seem to be firm overall, with one building having already secured 90% of its?tenants.

TOKYO?S 23 WARDS

Vacancy rate flat at 7.5%

The vacancy rate for Tokyo?s 23 Wards remained flat from the previous quarter at 7.5%. New supply in Q4 was approximately?30,000 tsubo, comparable to the level in the previous quarter. The?risk of oversupply was minimal, and redevelopment of large buildings resulted in the demolition of over 30,000 tsubo. This helped keep vacancy rate flat despite the fact that the growth in demand rose little more than 15,000 tsubo. The demand absorbed by existing buildings this quarter was approximately 120,000 tsubo, which is at similar levels from the previous quarter?s 150,000 absorbed tsubo. With the lack of large scale relocation activities, the overall demand ended up being sluggish in terms of net-absoprtion. There were an increased number of buildings with more than 1,000 tsubo of vacant space this quarter, which was a result of impending vacancies becoming realized from the past large scale relocations. While these buildings are receiving inquiries, it appears to be taking time to finalize deals.

Vacancies of 100 to 1,000 tsubo decline

Mid-scaled relocations have been active this quarter. Filing of vacancies in the 100 to 1,000 tsubo range increased q-o-q from 73,000 tsubo to 78,000 this quarter. This exceeds the amount of vacancies emerging in the same scale by more than 20,000 tsubo. While there seems to be fewer large-scale relocations this quarter, mid-scale relocations are being observed by a wider range of tenants for BCP purposes. These mid-scale relocations are anticipated to push demand in the future.

Focus is on the 2013 pre-leasing activities

The pre-leasing status of new buildings coming online in 2013 is high, companies considering large scale relocations may make decisions faster once there are signs of macroeconomic improvement. This brings anticipation of an increase in the rate of demand in the market. In some areas, rents have already increased, with rental increases centering on large buildings. Rents are expected to increase in a wider range of areas once demand is sustained.

OSAKA

Vacancy rate decreases in Grade A buildings, and Osaka overall

The vacancy rate in Osaka during the fourth quarter of 2012 was 9.4%, a decline of 0.4 This is the fifth consecutive drop. The Grade A vacancy rate was down 2.9 to 8.7% as a Grade A building was completed ai high occupancy this quarter, and anoiher large building secured a ienani that would lease over 3,000 isubo of available space.

Large building completed at high occupancy

A large office building was completed Nakanoshima this quarter.?This is a mixed-use building which has the capacity to lease out office?space in addition to the owner-occupied space, along with a music hall and retail complex. Its landmark status has drawn demand from existing buildings in the vicinity to achieve high occupancy upon completion. While there are concerns of the vacancy rate increasing resulting from these tenant moving, the effects are thought to be minimal as some of these buildings are subject for redevelopment due to their age. Other trends within Osaka include scattered cases of relocation from aging company-owned buildings to newer large buildings, integration of company offices that had been dispersed at multiple locations including company-owned suburban buildings, and other moves that tend to increase leasing activity in the office market.

Corporate mindset towards relocation is firm; demand expected to be

Tenant demand tended to concentrate at buildings of a certain grade?and level of competitiveness, particularly those in favorable locations, built relatively recently, and meeting the latest seismic resistance standards, With rents at newer and larger buildings at levels compatible with the of cost tenants are able to bear, corporate attitudes toward relocation have been improving, so that demand is expected to remain strong at newer and larger buildings in the near future.

NAGOYA

Nagoya?s citywide vacancy rate falls for 10th straight quarter

The vacancy rate in Nagoya fell 0.1 points this quarter to 11.3%,?which was its 10th consecutive decline. Having reached a peak of 14.3% during the second quarter of 2010, the vacancy rate has improved by 3.0 points during the intervening two and a half years.?A trend ?oward companies expanding is a|ready under way, including relocations for expansion of existing offices and the establishment of new offices. This is part of the overall trend of the vacancy raie declining, but discrepancies have been observed between different areas. With demand tending to concentrate in the
Meieki-area, progress in improving vacancy rates has been at a standstill in other areas such as Fushimi, Marunouchi and Sakae. Efforts to attract tenants with relatively competitive rents and other incentives in these areas have been ongoing. In the Meieki station area, meanwhile, vacancies at newer buildings have been decreasing, putting a stop to declines in rent levels.

Grade A vacancy rate improves further

The vacancy raie at Grade A buildings fell 0.9 points io 1.8%.?Demand for space at Grade A buildings was strong, due in part To BCP efforts, and large scale vacancy spaces were filled by the opening of new offices. With no new Grade A supply during the three years since 2010, supply remains tight. While assumed achievable rents remained flat during the quarter, Grade A rents in the Meieki area are at their tipping point.

No new supply this quarter; low level of new supply expected in?201 3

There was no new supply during the review quarter, and new supply?is expected to remain low throughout 2013. Until the scheduled completion in 2015 of multiple large-scale development projects fronting Nagoya Station, new supply is forecast to remain low.?Barring any alteration of economic trends, vacancy rates are therefore expected to continue their gradual decline throughout 2013.

ADDITIONAL JAPAN MARKETS

SAPPORO

Office market characterized by continuing declines ?vacancy rates

Call centers continued to relocate in order to expand operations.?Furthermore, relocations to landmark and newer existing buildings were?observed, as well as scattered cases of companies relocating to better?locations. Large scale vacancies are becoming scarce as a result, and those?impending vacancies were quickly filled in some buildings. It is particularly?difficult to secure large scale spaces in the city centers, and demand has?spread to the Sapporo Station North Exit and Nishi 11-chrome areas, where?inquiries are concentrated on buildings with large vacant space available.?The vacancy rate in Sapporo fell 0.5 points to 8.3%. Although the vacancy?rate was Flat in the Sosegawa-h?gashi area, the rates for central Sapporo,?as well as the areas around the Sapporo Station North Exit and Nishi 11-chrome all declined. As vacancy rates continue to decline, there is some?concern that demand will run up against a lack of appropriate supply.

SENDAI

Major decline in vacancy in Minamimachi Dori area

With space being scarce around Sendai Station, tenants are increasing the?range of locations which they will consider. There has also been an?increase in the number of inquiries for spaces of 50 tsubo or less, as?companies open new offices as well as expand, and this trend? expected?to continue into the beginning of 2013. Furthermore, the change in the?government is anticipated to speed up the disaster recovery measures,?which would be a plus for office demand. The vacancy rate in the Minami-dori area saw a major decline, leading The overall vacancy rate in Sendai to drop 0.9 ?to 12.0%. The vacancy declines in the Minami-dori area?were due to select consolidating into two large buildings, occupying?spaces of over 300 tsubo each, over multiple floors.

SAITAMA

Vacancy rate in Saitama falls to mid-4% range

Although relocation activity has been sluggish due to the scarcity of large scale vacant space, one company in Omiya relocated 500 tsubo from the station?s East Exit area to the West Exit area in order to improve its location. In the East Exit area, there are scattered cases of new service oriented?businesses opening, such as esthetic salons and cram schools. Overall,?many tenants are looking to expand, but lack the resources to relocate to?large buildings, leading them to make due with expanding within their?existing building. With firm demand continuing, impending vacancies are?expected to till relatively easily, and owners of some large buildings intend?to raise asking rents when new vacancies emerge. The vacancy rate in?Saitama dropped 1.5% q-o-q points to 4.1%. This is by far the lowest?vacancy rate of any major city in the country. With such? space?available, the issue is the extent to which demand can be matched up the?space which is available.

YOKOHAMA

Vacancy rates decline moderately with multiple large relocations

Despite no new supply coming? in the review quarter, the market was?very active, including not JUst an increase in large relocations, but? an?increase in activity involving smaller floor areas. Large buildings at the?station?s West Exit have been successful at filling vacancies, and large scale?space in this area is no longer available. Yokohama?s vacancy rate was at?10.2%, falling by 0.1 points? Demand has been so firm that even?buildings farther from the station which have struggled in the past have?been able to reduce their vacancy by attracting an increasing proportion of?small-scale tenants. There was an active inflow and outflow of tenants in the?Minato-mirai area. While large scale vacancies emerged in existing?buildings resulting from tenants moving out, there was also a rare case?where a company made a large scale move from Tokyo. Although?companies relocating in the Kannai area are from within the same area, an?influx of demand from surrounding areas has also been seen, pushing?down vacancy. Demand is active in the Yokohama Station East Exit area,?with large scale vacancies expected to be filled going forward. While?demand is anticipated to improve, vacancy rates will need to decline further?before there is any turnaround in rental rates.

KANAZAWA

Demand firm in Kanazawa Station area

Office demand was concentrated in the Kanazawa station area, with the?vacancy rate improving in the station area. In the Minamimachi area,?however, there were scattered cases of buildings with large scale vacancies?remaining unfilled, and the vacancy rate is diverging between?Minamimachi and the Kanazawa Station area. Demand was mainly driven?by tenants relocating to improve the location and specs of their buildings,?as well as cases of tenants moving to increase leasing space. The vacancy rate in Kanazawa declined for the third straight quarter to 17.7%. This is a?decline to 1.3 points? While the |eve| of demand decreased during the?quarter, this affected the vacancy rate less than otherwise would be?expected as buildings were converted to other uses, and were therefore?excluded from the statistics.

No new supply is expected in 2013, and the vacancy rate is expected to keep improving. The opening of the Hokuriku Shinkansen high-speed?railway line is expected to continue concentrating demand around the?Kanazawa station area.

KYOTO

Although vacancy rates decline, companies still cautious on relocation

Amid declining rental levels in Kyoto, demand increased from companies?relocating out of their own buildings as rents declined, and companies?consolidating their operations from the suburbs to the city center. There was?also an influx of demand coming from established companies newly?entering the rental market. This led the vacancy rate to decrease to 8.2%, a?decline of? points? Vacancy declines were also supported by?numerous small scale expansions from companies expanding within their?existing buildings. The first quarter of 2013 is expected to see multiple?large tenants, each occupying over 100 tsubo, withdrawing from the?market, which may push the vacancy rate up. These large scale spaces?opening up may provide an opportunity for tenants to become active, but?companies are showing caution towards relocating, which lead to a more?measured market recovery.

KOBE

First signs seen of activities that lead companies to expand

In the fourth quarter of 2012, companies continued relocating from?suburban locations to the city center, and from company owned buildings to?rental space, pushing the vacancy rate down to 9.8%, a q-o-q decline of?1.4 points. This was the fourth consecutive quarter of declining vacancy?rates. Declining rents stoked demand, with some companies relocating to?better locations, or expanding on the back of their strong business?performance. The number of companies relocating to more expensive space?is limited, but the low level of new supply coming online is expected to?continue to push the vacancy rote lower. Furthermore, a building that held?large vacancies was removed from the market supply as part of the change?in its building management, which contributed to the decline in Kobe?s overall vacancy rate.

HIROSHIMA

Changes in management and organizational structure lead demand

In the fourth quarter of 2012 demand in Hiroshima was propelled by?companies relocating due to corporate restructuring, as well as revised?organizational and administrative structures This helped Hiroshima?s?vacancy rate decline for the fifth consecutive quarter to l 1.2%, a decline of0.2 points? q-o-q. New leases, companies relocating as their business?expands, companies relocating from the suburbs to the city, and companies?moving out of their own buildings also account For the increased demand.?The low vacancy rates at prime buildings have led companies to delay?expansion plans, and therefore the vacancy rate is expected to decline?moderately.

TAKAMATSU

Demand For buildings with new seismic standards remains strong

Demand in Takamatsu came mainly from companies moving into buildings?with a higher? of earthquake resistance, This included companies?relocating out of their own buildings in the suburbs, as well as companies?moving to buildings with higher specifications within the same?neighborhood. The vacated company owned buildings are expected to be?sold or rented. This is an indication of the priority that tenants are putting on?buildings with a high level of earthquake resistance. Additionally, buildings?seeing high demand have a frontage on the main streets. Tenants continue?to remain very cost conscious when relocating, and therefore any?turnaround in rents is expected to be measured, although new leases and?companies that are taking more space have continued to increase since the?previous quarters Demand is expected to continue to be concentrated at?newer buildings with competitive rents and a high level of earthquake?resistance. While one large vacancyI resulted from the withdrawal of one?tenant occupying over 100 tsubo, the vacancy rate remained flat q-o-q? at?18%.

FUKUOKA

Tenant attitudes toward relocation remain firmly positive

Although the market was subdued in the review quarter, tenant activity?included new leases, expansion relocations, and relocations from the?suburbs to the city center. Some buildings that had previously been holding?out for higher rental levels saw their vacancy decline as they became more?flexible, and more competitive rental levels attracted tenants regardless of?the age of the building. The fourth quarter of 2012 saw Fukuoka?s vacancy?rate decline slightly to 10.6%. This is the first time in tour years that the?vacancy rate decreased below 11%, and the 0.6 points? decline was?the fifth consecutive quarter the vacancy rate dropped. With new supply?continuing to be limited in the next two quarters, and a lack of available?space in newer and prime buildings, the key to whether Fukuoka can?sustain this declining vacancy is the extent to which older buildings can?absorb demand with more competitive rents.

MARKET OUTLOOK

NATIONWIDE

Trend toward reduced vacancy rates continues; Rents Flat overall?despite increases in certain areas

Tenants continue to be open-minded to relocating, with the first signs?seen of activities that lead companies to expand and the trend of?relocating to higher quality buildings continues nation-wide. Business?performance is anticipated to improve, backed by the both the?recovering foreign demand and expanded domestic demand.?Vacancy rates can be seen to improve as demand is expected to?become more active. The current affordable rent levels are the main?drivers and motives for corporate relocations As of result, rents are?expected to be flat for the time being, despite scattered instances of?rental increases in areas with low vacancy, as companies will need?more time to bear substantial increase in the rents they pay.

TOKYO

Vacancy rates steadily improve; Rent increases may spread to more areas

In Tokyo, the? pre-leasing status of new buildings expected to be?completed in 2013 are at high levels.?A gradual economic recovery is expected to prompt a wider range of?companies To be more amenable to relocating. If This is the case, a?steady improvement is anticipated in the vacancy rates not just for the?Grade A market, but for Tokyo?s 23 Wards as a whole. With Grade?A rents expected to have bottomed out in the Fourth quarter of 2012,?they are expected to rise by 3% to 5% from its current? in a year?from now. Rents in some areas of Tokyo?s 23 Wards have already?started to increase, particularly at large buildings. It demand is?sustained, more areas are expected to see rents to start rising, with?rents of Tokyo?s 23 Wards anticipated to rise midyear or during?autumn 2013.

OSAKA

Vacant space is being absorbed; Grade A rents rise slightly

In Osaka, demand has been led by companies relocating to expand,?with demand being concentrated at high quality buildings with improved earthquake resistance. Although Grade A rents are?trending slightly upward, with the large quantity of new supply?scheduled to arrive in spring 2013, more time may be needed before?there is sustained upward pressure on rents. Companies continue to?be open-minded regarding relocation, with a sustained level of?demand and a lack of new supply in the second half of 2013, it is?possible that rents may turn around 2013.