GDP Forecast to Shrink at Postwar Record Annualized 23.53% for April-June
Japan’s GDP growth dropped for the second consecutive quarter, down an annualized 2.2% (q-o-q) in Q1 2020, with the impact of the COVID-19 outbreak coming on the heels of the consumption tax hike in Q4 2019. Capital investment showed positive growth following revision, but may be revised again in August following the findings of the Statement Statistics of Corporation by Industry. In the logistics sector, disrupted supply chains, shipments and scheduled flights caused delays, while the fall in imports in turn caused container shortages that restricted exports. The BOJ expects a serious GDP contraction for April - June, while the JCER predicts an annualized drop of 23.53%, a postwar record exceeding the GFC impact.
Demand for Small – Medium Offices Slows as Remote Work Takes Hold
Asking rent for Grade A office space in Q2 2020 was JPY38,133, up 1.61% y-o-y. The vacancy rate was 1.74%, down 0.33 pp y-o-y. On a quarterly basis, rent fell 0.61% and vacancy rose 0.18 pp, indicative of weakness, and the number of office building plots advertised has risen consistently since March, notably in June. Struggling SMEs, together with growing remote working, have contributed to office space downsizing and lease cancellations. According to TSR, there were 4,001 bankruptcies in January - June, up 0.27% y-o-y, the first deterioration since 2009, although the overall number is still low. Firms seeking to cut fixed costs and the shift to remote working have had a significant impact on the leasing market. For example, Hitachi will enable remote working as a standard process by Q1 2021, while Fujitsu will implement it for around 80,000 of their staff in Japan, reducing their office area by 50% by 2022. Many others, including GMO Internet Group, Toshiba, Digital HD (formerly Opt HD), Dwango and Calbee have also moved to follow suit. SMEs are actively switching to remote work, and although larger firms may take longer, there are expectations that the Grade A office vacancy rate will rise in the near-term.
New Completions Enjoy Strong Occupancy, But Secondary Vacancy Likely to Rise
Nine out of 12 new Grade A office buildings scheduled for 2020 have been completed, enjoying high occupancy rates. However, relocation activity for the associated secondary vacancy is scarce, and, coupled with a rapid slowdown in corporate floor space expansion, there is a strong possibility that the market will shift from landlord-favorable to tenant-favorable soon. The Shibuya area in particular, having seen strong demand from the tech sector in recent years, is expected to see a spike in vacancies due to accelerated remote working and a concentration of start-up companies. Although incoming new supply will ease this year, a record level is planned for three years from 2023. If the market turns and asking rents fall, tenants will have the opportunity to upgrade, stimulating relocation demand. On the other hand, drivers of demand for tenants are definitely changing, and developers will need to review the future supply-demand balance, bearing in mind the declining absorption rate of office stock.