Demand forecast based on the impact of COVID-19

Deloitte Tohmatsu Financial Advisory LLC

Demand forecast based on the impact of COVID-19Introduction to forecasting office demand

September 2020

© 2020. For information, contact Deloitte Tohmatsu Financial Advisory LLC.

Contents

1. Overview of forecasting model for office demand p.3

2. How to build a forecast model p.6

3. Demand forecasting results p.11

4. Concept of forecasting for specific areas and company p.17


1. Overview of forecasting model for office demand

3

© 2020. For information, contact Deloitte Tohmatsu Financial Advisory LLC.4

The Purpose of demand forecast

Future economic impact can be simulated by constructing forecast model based on the related indicators in the real estate market under the influence of COVID-19.

Build a forecast model for real estate market trend based on prior research in order to understand the impact of COVID-19.

Building a forecast model

Following prior research by XYMAX Corporation, we try to build a forecast model for office demand.

Organizing related data sets

The learning data, such as the number of office workers, rent, or other information related to office market trend, is collected for building the forecast model.

Building a forecast model

Clarify the time and cost required to recover from the decline due to COVID-19 from the demand forecast.

Visualize the degree of decline of each index using forecast model in Deloitte way

The forecast model is constructed by using the various economic index as leading indicator and including the materials published by public organization. The downward trend of the indicators that lead to decision making in companies can be predicted.

Forecast the time required for recovery

Estimate the time needed to overcome the recession due to the influence of COVID-19

Forecasting future demand

notes※This forecast is based on publicly available information as of mid-July 2020.※This forecast does not identify and quantify all uncertainties related to COVID-19 and the impact of their consequences. It might cause a great impact based on changes in market conditions.


The forecast target is limited to offices, excluding other property types such as stores and commercial facilities.

Property type

Overview of demand forecasting model

For the target of demand forecast, property type is set as office, and region is set as Tokyo. Regarding the method, the model is built by referring to the prior research.

5

Target region is set to Tokyo judging the degree of data enrichment from the analysis of data sets.

Region

Reference study

出展：ARES 不動産証券化ジャーナル Vol.45「不動産市場を俯瞰する～計量経済学的アプローチ～」株式会社ザイマックス

Forecast model is constructed by referring to the XYMAX’s report and adjusted by the acquired data.


2. How to build a forecast model

6


Data overview

We collected and organized both supply and demand indicators and leading index used for forecasting the number of office workers. In order to adjust the number of office workers, a forecast scenario was set using the remotework implementation rate.

Data

Stock

Vacancy rate

Remotework coverage

Demand

Supply

details term / sourcevariablescategory

Stock ×（１－ Vacancy rate）

The difference between current values and previous.

①23 wards of Tokyo ②5 wards of center city（Chuo-ku, Minato-ku, Shibuya-ku, Shinjuku-ku）③18 wards of Surroundings

Office building more than 3000 tsubo in Tokyo. Convert total floor area (tsubo) to loan area (1,000 m2).

Use rent index of the new contract and the data of rental office building contract owned by XYMAX Corp.

Remote work implementation rate in Tokyo are obtained from the survey of Ministry of Internal Affairs and Communications before COVID-19 (September 2019), and other organizations after COVID-19 (March-May 2020).

term：Q1/2001～Q1/2020

source：Census 2015

term：Q3/2002～Q4/2018

term：Q1/2002～Q1/2020

source：XYMAX co,.ltd./Miki Shoji Co.,ltd

term：Q1/2001～Q1/2020

source：XYMAX co,.ltd./Miki Shoji Co.,ltd

term：2001年Q1～2020年Q1

source：XYMAX co,.ltd.

The transition to remote work is progressing by 30-40% compared to before COVID-19. Tokyo is shifting to the most remote work compared to the whole country

Scenario

Rent

Number of newbuildings

The rentable ratio was calculated from the Miki Shoji office market information and converted from the total floor area (1,000 m2) to the loan area (1,000 m2).

term：Q1/2002～Q1/2020

source：Tokyo Metropolitan Govt.

Number of office workers

Exclusive area

Absorption

term：Q1/2002～Q1/2020

The occupation data , such as Administrative workers, professional / technical workers, clerical workers, is collected from the census. The labor force survey is used for interpolation .

Leading index Economic indicators Stock index（REIT・TOPIX）,Machinery orders, Diffusion Index of

Lending Attitude（Real Estate）、BSITerm：Q2/2005～Q1/2020


We forecast the number of office workers from economic indicators, which are leading indicatorsand the remote work implementation rate. We try to build a model that predicts rent from the causal relationship between supply and demand indicators.

8

Causal relationship between data and indicators required for demand forecasting

Exclusive area

Absorption

Forecast for office workers by leading indicators

Number of office workers

Machinery orders

Leading indicators

BSI

Diffusion Index of Lending Attitude

TOPIX

REIT

Demand index Supply index


Stock

Vacancy rate

rent

Office rent

Forecast for supply and demand index by causal relationship of variables Forecast for rent

Scenario parameter

Remotework coverage ratio

①

②

③

③

④

④④

⑤

Deloitte way

Deloitte way


Algorithm（①、③、④、⑤）

In addition to the rent and absorption forecast models that denote office demand, we also tried to build a forecast model for the number of office workers that was not conducted in prior research.

9

𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡−20 + 𝛽𝛽2𝑅𝑅𝑇𝑇𝑇𝑇𝑅𝑅𝑇𝑇𝑡𝑡−20 + 𝛽𝛽3. 01𝑊𝑊𝑘𝑘𝑊𝑊𝑘𝑘𝑘𝑘𝑡𝑡−20 + 𝛽𝛽4𝐷𝐷𝑅𝑅𝑡𝑡−20 + 𝛽𝛽5𝐵𝐵𝐵𝐵𝑅𝑅𝑡𝑡−20 + 𝑡𝑡𝑊𝑊𝑊𝑊𝑡𝑡𝑡𝑡 + 𝑡𝑡1 + 𝑡𝑡2 + 𝑡𝑡3 + 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊

𝑅𝑅𝑊𝑊𝑡𝑡𝑡𝑡𝑡𝑡 = 16.00− 114.6𝑉𝑉𝑘𝑘𝑉𝑉𝑘𝑘𝑡𝑡𝑡𝑡−1 + 298.0𝐴𝐴𝐴𝐴𝐴𝐴𝑊𝑊𝑊𝑊𝐴𝐴𝐵𝐵𝑡𝑡𝑊𝑊𝑉𝑉𝑊𝑊 𝑡𝑡−1

+ 0.90𝑅𝑅𝑊𝑊𝑡𝑡𝑡𝑡𝑡𝑡−1 + 𝑡𝑡1 + 𝑡𝑡2 + 𝑡𝑡3 + 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊

①Forecast model for number of office workers

③Forecast model for Absorption

④Forecast model for volume of newbuildings

⑤Forecast model for rent

Previous vacancy rate Previous rentAbsorption

Number of buildings postponed

Stock Vacancy rate postponed Absorption postponed

Necessary number of buildings

Volume of newbuildings

rent

Absorption Number of office workers las year’s

Office space per worker

Absorption postponed

Exclusive area postponed

Leading economic indicators postponedNumber of office workers

Absorption postponed


Summary of the forecast scenario（②）

The forecast scenario to be incorporated into the demand forecast was set from the remotework implementation status around COVID-19 of the external material, such as Ministry of Internal Affairs and Communications and others.

The report of current situation regarding remotework（TCCI）

Communications Usage Trend Survey（Ministry of Internal Affairs and Communications,

JAPAN）

Remotework coverage was 67%, an increase of 41.3 points compared to the results of the previous survey at the end of March.

The highest percentage of remoteworking employee was "61% -80%" (24%) for all employees.

The most frequent remoteworking was "5 days a week" (35%).

The survey was targeted to the member companies of the Tokyo Chamber of Commerce and Industry.

The survey published at the end of May 2020 showss the result of September 2019.

The number of companies that have introduced or are planning to introduce remotework is increasing, and it is around 30% of the total.

Result by industry, the information and telecommunications industry (47%) was the highest and the transportation / postal industry (12%) was the lowest.

The real estate industry results in 25%.

Remotework coverage in TokyoRemotework coverage before COVID-19

55%

20%

10%

The 1st time3/13~3/31

23%

The 2nd time4/7~5/25

26%67%

under reviewnot ready ongoing

10% 12% 9% 12% 16% 13% 14% 19% 20%

7% 9%

2013

85%86%

2019

3%

83%

2015

3%

2016

82%

4%

2017

74%

20182012

86%

3%4%

80%

20142011

4%

87%

3%

70%

not ready under review ongoing

General survey for COVID-19 measures（Ministry of Health, Labour and Welfare, JAPAN）

The surveys were conducted four times for service registrants using the official account of LINE Co., Ltd.

Remotework coverage rate increased nationwide after the state of emergency on April 7. It has not reached the government goal of "70%“.

Tokyo is the highest among all other cities, remotework coverage rate of 52% in the 3rd survey

Social distancing measures in Japan

14% 16%

27%31% 35%

52%

The 1st time3/31~4/1

The 3rd time4/12~4/13

The 2nd time4/5~4/6

The 4th time4/1~4/2

Japan Tokyo

unpublished


3. Demand forecasting results

11


Forecast for number of office worker

The number of office workers is estimated based on the historical trends of leading indicators. After COVID-19, the number of office workers is estimated according to new normal workstyle premised on remote work.

12

2,000,000

2,100,000

2,200,000

2,300,000

2,400,000

2,500,000

2,600,000

2,700,000

2,800,000

2,900,000

3,000,000

20242004 2005 2016 202520122006

（people）

2003 2007 20092008 2010 20182011 2013 2014 2015 2017 2019 2020 2021 2022 2023

Forecast

Model Structure

machinery orders

BSI

Diffusion Index of Lending Attitude

Number of office worker

TOPIX

TSE REIT

explanatory variable outcome variableAdjusted number of

office worker

Remoteworkcoverage ratio

Parameter value

predictive value

15% down from forecast

①

②

Actual value


Forecast for Absorption

Absorption will decrease sharply after Q1/2021 under the influenced of COVID-19 due to the causal relationship that it increases as the number of office workers increases.It is predicted that it will start to rise after Q4/2021 and return to positive in Q2/2023.

13

-1,200

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

20172008 20122009

（1000㎡）

20042003 2005 2006 2007 20152010 2011 2013 20242014 2016 2018 2019 2020 2021 2022 2023 2025

Forecast

Model Structure

Previous absorption

Number of office workers last year’s

Office space per workerAbsorption

Previous exclusive area

explanatory variable outcome variable

2021Q4

③

Actual value


Forecast for volume of newbuildings

The number of newbuildings is influenced by demand trends such as stock, vacancy rate, absorption, and the number of buildings built in the past.It is predicted that the number of newbuildings will decrease after Q1/2022 and will start to rise once after bottoming out in 2022.

14

50

100

150

200

250

300

350

202520172004 2010

（1000㎡）

20132003 20072005 2006 2008 2009 2011 2012 20202014 2015 2016 2018 2019 2021 2022 2023 2024

Forecast

Model Structure

Stock

Previous Vacancy

Previous Absorption


Previous Number of newbuildings


77.8千㎡

④

Actualvalue


Forecast for vacancy rate

Before COVID-19, the vacancy rate remained low due to the increased demand. However, it is predicted that it will start to rise after Q2/2021 due to the decline in absorption, and will reach 10%, exceeding the level of 2003 or 2011.

0

5

10

15

20

25

30

2016 20182003

（％）

201220052004 2006 2007 2008 2009 2010 2011 2013 2014 2015 2017 2019 2020 2021 2022 2023 2024 2025

Forecast

10.0％

Definition of vacancy rate

DemandStock

Vacancy rate

Stock＝

＋

※ Demand ＝ Exclusive area

Absorption＋

Actual value


Forecast for rent

Rent is dropped as the increased vacancy rate and the decreased absorption rate.Rent index for new contract is expected to decline from Q2/2020 and fall to 81.8 in Q1/2024.

16

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

20182007

Rent index fornew contract （2011Q1=100)

2003 2008 201020052004 2006 2009 2011 2012 2013 2014 2015 2016 2017 2019 2020 2021 2022 2023 2024 2025

Forecast

Model structure

Previous rent

Previous vacancy rate

Absorption rate

rent


⑤

81.8


4. Concept of forecasting for specific areas and company

17


It is possible to make predictions for different facility type and region, and to provide the advise for different businesses.

Demand forecast by facility type

It is possible to forecast the number of office workers based on the leading indicators by region and prefecture, and to make detailed demand forecasts using each statistical index.

Demand forecast by region or prefecture

Economic indicators

Data sets by region or prefecture

Remoteworkcoverage ratio

Forecast for rent at Hokkaido

As forecasting by facility type such as offices, restaurants, commercial facilities, etc., it is possible to forecast demand according to the portfolio of each company.

18

Forecast for rent at Tokyo

Forecast for rent at Okinawa

55%

15%

25%

5%

Office オフィスRestaurant Shops Other

It will be possible to lead to the formulation of more elaborate future business plans.

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Demand forecast based on the impact of COVID-19