A serious rise in vacancy levels in the Japanese commercial property market is a result of complete lack of demand but there is hope that foreign property investors are eyeing bargains and may become active towards the end of the year, according to DTZ, and companies in bankruptcy are downgrading their offices to lower grade buildings in less prominent locations.

In Q1 2009, Vacancy for Tokyo Grade A offices fell to 6.73%, a fall of -1.54% from the previous quarter. It is the first time in 19 quarters since the second three months of 2004 that it has gone over 6% and the report describes the situation as ‘serious’.

Rentals declined further by -4.7% in the first quarter of 2009 from the last quarter of 2008. It has now dropped by -16% from the peak of rentals recorded at the end of 2007. The report said: ‘As the gap between asking rent and achievable rent is expanding, the real rent acquired by landlords should be much lower.’

Due to weakening corporate demand, The Osaka office market stayed gloomy during the first three months of 2009. With an increasing amount of new supply, it became difficult to fill the vacancies both in existing and new buildings. Vacancy for Grade A offices was 5.38%, up by +1.09% from the previous quarter, the first time that rates went beyond 5% since 2005. In Osaka, rentals declined by -0.2% in Q1 2009 compared to the previous quarter and by -1.3% compared to the same period in 2008.

The report also said that the real estate investment market remained quiet at the beginning of 2009. However, anecdotal evidence suggest that there were increased purchasing activities among corporate as well as high net worth individuals looking at small sized properties who have found the current situation attractive as the market cools down with limited number of players.