Tokyo Grade A office rents inch up 0.1% in Q3

And average vacancy rates slightly softened to 3.4%.

The optimistic situation appears to be continuing in Tokyo’s Grade A office market in Q3/2023, according to a Savills report. Indeed, the market had been growing increasingly stable throughout previous quarters in 2023, and now appears to be charting a course of recovery. 

“Average rents in the central five wards (C5W) experienced a modest increment over the quarter at 0.1% to JPY32,410 per tsubo, which translates to an annual decline of 1.2%. Consequently, the total rental contraction from the peak levels of Q2/2020 were around 14.4% for the Tokyo C5W Grade A office market,” the report said.

Here’s more from Savills:

Average rents remained stable across the constituent wards of the C5W in Q3/2023, with only modest changes in rents recorded over the quarter. The largest rental increments were in Shibuya and Shinjuku, where rents increased by 0.4% QoQ and 0.3% QoQ, respectively, while Minato rents increased by 0.1% QoQ. 

Elsewhere, rents contracted marginally at 0.2% QoQ in Chiyoda and Chuo. While rental changes have been nominal this quarter, the gentle upswing in average rents is undoubtedly a positive sign following the declining trend since the pandemic. 

On the other hand, the average vacancy rate for Grade A offices softened moderately at 0.8ppts QoQ to 3.4%, following some tightening in recent consecutive quarters. An outsized proportion of this took place in Minato ward, which experienced a quarterly increase in vacancy of 3.4ppts, largely due to the recent addition of a large amount of new supply in the ward. 

Elsewhere, despite the uneventful absorption of Midtown Yaesu Central Tower, vacancy in Chuo loosened by 2.6ppts QoQ, particularly given the poor performance of offices in Harumi. Meanwhile, vacancy decreased in Shinjuku and Shibuya by 1.0ppts QoQ and 0.7ppts QoQ, respectively. 

Corporate performance has been strong, and the competition for talent continues to intensify. In addition, more companies are mandating greater office participation. As such, the appetite for larger office footprints should increase going forward. Welllocated and modern offices with strong ESG features, which also support hybrid working arrangements will likely be particularly attractive. As such, several Grade A office buildings in prime locations with low vacancies have begun to increase rents. 

However, there are some concerns regarding the “2023 problem”, whereby the large upcoming office supply may cause further temporal increases in vacancies, consequently dampening the recovery of the market. 

Additionally, hybrid work arrangements remain commonplace in Tokyo, with the Tokyo Metropolitan Government Survey reporting that over 45% of companies in the Tokyo 23W have employees working at home as of July 2023. As such, some major new additions to the market arrived with large amounts of empty space, and many building owners are offering further incentives to attract and retain tenants. 

Nonetheless, the Japanese economy has been performing relatively well, and should form a base for firm demand for office space, which, in conjunction with the current low levels of vacancy, is a good sign for the market.