Tokyo’s 2023 new office supply expected to reach record levels

It’s set to be the second largest supply volume according to JLL data. 

One Grade A office building, Toranomon Hills Station Tower, entered the Tokyo market in 3Q23, increasing stock by 1.0% q-o-q, said JLL in a report. The schedule of new supply for full-year 2023 is the second largest volume since JLL started tracking it, and 86% has been completed as of 3Q23.

“Tokyo’s vacancy rate in the Grade A office market averaged 4.7%, decreasing 10 bps q-o-q and increasing 50 bps y-o-y. This was the first q-o-q decline in two quarters, in part reflecting uptake of newly supplied buildings. Looking at submarkets, the vacancy rate improved in both Marunouchi/Otemachi and Akasaka/Roppongi submarkets,” the report added.

Here’s more from JLL:

According to the Tankan Survey in September, the diffusion index of large manufacturers recorded at 9, a second consecutive quarterly increase. The index of large non-manufacturers increased for the sixth consecutive quarter to reach 27 as economic recovery continued.

As major new supply stimulated demand, net absorption in the Grade A office market in Tokyo totalled 110,000 sqm in 3Q23, equivalent to 112% of 2022’s full-year figure due to a large-scale new supply. Looking at industries, the figure was driven by information and communications, finance and insurance, and manufacturing.

The decline in average rents continues

Rents in Tokyo’s Grade A office market averaged JPY 33,585 per tsubo, per month, at end-3Q23, decreasing 1.0% q-o-q and 4.0% y-o-y. Rents fell for the 14th consecutive quarter in all submarkets. The rate of decline was mostly in line with the previous quarter.

Capital values in 3Q23 fell 1.9% y-o-y for the third consecutive quarter and was down 1.4% q-o-q for the second consecutive quarter. This reflected negative rent growth as cap rates remained stable. There were no Grade A transactions in the quarter.

Outlook: Rents and capital values to decline gradually

According to Oxford Economics’ forecast as of September 2023, the GDP growth and CPI was 1.6% and 3.0% respectively, for year-end 2023, and 0.6% and 1.4% respectively, for year-end 2024. Risks include the downturn in overseas economies, inflation and volatility in financial markets.

Leasing volume is expected to slow down until the end of the year and into the next year as there are few projects left uncompleted. Vacancy rate is expected to gradually rise through year-end and put downward pressure on rents, although tenant demand is likely to be solid. Capital values are expected to gradually fall due to anticipation of further rent declines and unchanged cap rates.

Note: Tokyo Office refers to Tokyo's 5 Kus Grade A office market.