Tokyo’s office capital values drop for fourth consecutive quarter

Capital values decreased 3.1% in 1Q21.

According to the Tankan Survey in March, the diffusion index of large manufacturers was 5, improving 15 points compared with the previous survey. This was the third consecutive quarter of improvement, bringing the figure to pre-COVID-19 levels on the back of increasing production and exports. Non-manufacturers reflected -1, increasing only 4 points from the previous survey.

JLL reveals Tokyo’s office net absorption was 22,000 sqm in 1Q21, recovering from negative levels recorded in the previous quarter. Activity was subdued with a second state of emergency declared in early January and extending to late March. In addition, limited availability of vacant stock continued on the back of a 1% vacancy rate environment, with the next supply delivery scheduled for 2022.

Here’s more from JLL:

New supply additions totalled 48,000 sqm in 1Q21, increasing the stock by 4% y-o-y. World Trade Center Building South Tower entered the market with a healthy commitment rate at completion.

The vacancy rate stood at 1.6% at end-1Q20, increasing 30 bps q-o-q and 90 bps y-o-y. The vacancy rate has risen for the fifth consecutive quarter, since it marked 0.6% in 4Q19. Vacancy increased in most CBD submarkets including Otemachi/Marunouchi.

Rent and capital value decreases accelerate

Rents averaged JPY 38,351 per tsubo per month at end-1Q21, decreasing by 1.6% q-o-q and 4.9% y-o-y. Negative growth was observed for the fourth consecutive quarter, and accelerated from the previous quarter. Most submarkets, including Akasaka/Roppongi, registered a decrease of more than 2%.

Capital values decreased 3.1% q-o-q and 8.8% y-o-y in 1Q21, decreasing for the fourth consecutive quarter on the back of negative rent growth; cap rates were stable. In the investment market, J-REITs were active with notable transactions including Nippon Building Fund’s disposition of NBF Minami-Aoyama Building for JPY 31.6 billion, or at a cap rate of 2.3%.

Outlook: Rents and capital values to see correction in 2021

According to Oxford Economics as of March 2021, Japan’s real GDP is forecast to grow by 2.7% in 2021. The CPI was revised downwards, to fall by 0.5%. The economy is expected to pick up as socioeconomic activities resume on the back of supportive policies and the recovery of overseas economies. Risks include constrained business activity due to the spread of COVID-19.

Leasing market vacancy is expected to rise slightly as some corporates consolidate and reduce leased area to improve efficiency. This is expected to place pressure on rents, especially in submarkets that saw rent hikes. In the investment market, capital values may experience pressure, reflecting rental decreases; albeit, cap rates are expected to remain stable, reflecting investor interest.

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