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Tokyo Office Rent Falls to Record Low on Rising Vacancies

Tokyo’s office rent fell 3.7 percent in 2011 from a year earlier to a record low as vacancy rates remained high, according to Miki Shoji Co., an office brokerage company.

Rents in Japan’s capital, which have dropped every month for more than three years, declined to 16,932 yen ($220) per tsubo (35.5 square feet) on average in December from 17,585 yen a year ago, according to data compiled by the Tokyo-based firm. The vacancy rate in the city rose to 9.01 percent in December from 8.91 percent a year earlier, it showed.

Landlords are competing to fill space in Japan’s capital with supply expected to reach the highest since 2006, according to a survey by Mori Building Co. New office space will rise 12 percent to 1.54 million square meters (16.6 million square feet) this year, matching the level in 2006, the survey said.

“Rents may keep declining this year as landlords seek to improve the occupancy rate,” said Takashi Ishizawa, a Tokyo-based property analyst at Mizuho Securities Co. “We may see rents bottoming in the second half as the supply of new buildings slows.”

The vacancy rate has remained above 8 percent for the past two years, reaching a record 9.19 percent in March, when Japan was struck by a magnitude-9 earthquake, according to Miki Shoji. It started to climb in 2008, prompting rents to decline. Rents are now at the lowest since Miki Shoji started compiling data in 1990. A tsubo is a standard measure of property area in Japan.

Prime Buildings

The Topix Real Estate Index fell 0.8 percent in Tokyo, the biggest decline this week. The Tokyo Stock Exchange REIT Index dropped the most in two weeks, down 0.8 percent.

The vacancy rate for prime office buildings, which command the highest rents, may rise because of an increase in supply this year and as uncertainties over the global economy loom, said Andy Hurfurt, Tokyo-based executive director of CBRE Group Inc., the world’s biggest real-estate broker.

The vacancy rate for Grade-A office buildings may increase to 6 percent in 2012, compared with 4.6 percent in the third quarter of 2011, Hurfurt said. Rents may decline 5 percent this year, after dropping 5.2 percent in 2011, he said.

Higher vacancies “will keep landlords relatively flexible on rents,” said Hurfurt.

Profits at developers including Mitsubishi Estate Co., the owner of about 30 buildings in Marunouchi, Tokyo’s most expensive business district, and Mitsui Fudosan co., Japan’s biggest developer, fell as rents declined.

Developers Suffer

Mitsubishi Estate’s leasing revenue dropped 6.6 percent, sending profit from its building business 18 percent lower to 61 billion yen for the six months ended Sept. 30 from a year ago. Mitsui Fudosan’s leasing income fell 2.7 percent in same period.

A shortage of higher-end buildings may help boost rents later this year, Masahiro Mochizuki, a Tokyo-based analyst at Credit Suisse Group AG, said in a report dated Jan. 10.

“We forecast an increase in rents for new tenants in the Marunouchi area in the second half of 2012,” Mochizuki said. “A shortage of A-class buildings will emerge in the summer and we expect an upturn in Tokyo office rents, starting with the Marunouchi area.”

Japan’s property market became active in the middle of last year, as tenants sought buildings with better seismic resistance after the earthquake, CBRE’s Hurfurt said.

“Uncertainties over Europe, questions about the recovery of the U.S. economy and the strength of the yen” weighed on the market toward the end of the year, said Hurfurt. “That situation hasn’t changed.”

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