Why 2023 is a significant year for Tokyo’s office supply

The supply influx for this year is expected to be a ‘headache’.

Savills expects Tokyo’s office vacancy rates to loosen and rents to see further corrections during 2021. Clearly, the delayed start of the vaccine rollout will stall any chance of bringing workers back to the office, and the manifestation of secondary vacancy from the large supply in 2020 will impede Tokyo’s office market recovery. 

This will be especially apparent in office buildings that are less accessible. On the plus side, Savills says 2022 should serve as a buffer and provide enough time for the economy to fully open.

Here’s more from Savills:

Further down the line, the aforementioned supply influx in 2023 remains a headache. Any pain will be soothed, however, with the full recovery of the Japanese economy and subsequent rekindling of office demand helping push rents higher once more. Moreover, not only is 2023 a significant year for office supply, but it is also likely to have ramifications for the next wave slated for 2025 – where supply is currently forecasted to be more than 40% larger than the supply in 2023. 

Whilst concerns regarding vacancy are too early to assess, it is worth noting that a large proportion of the total supply, most of which is Grade A, is attributed to a few developers. As such, they may shift their focus towards tenants with better creditworthiness and building long-term relationships with prospective tenants, rather than achieving higher rents. Not only would this help alleviate some concerns over vacancy, but it should also positively impact market sentiment during the influx of new supply. 2023, therefore, looks set to be pivotal for the longer-term health of the market. 

When looking at the ward-level, some are expected to outperform others. Here, Chiyoda and Chuo should remain stable given their concentration of large Japanese corporations, ease of access, and central locations. In fact, Chiyoda is the only ward that has managed to hold vacancy levels flat since the onset of COVID-19. 

Elsewhere, Minato, which witnessed a similar amount of GFA expansion in 2020 as Chiyoda, has been dealt the double whammy of loosening vacancy rates and rents falling by double in comparison. Perhaps the fact that two of Minato’s main submarkets have almost double the vacancy of other submarkets within the C5W (Map 1) is partly to blame. Meanwhile, Shibuya’s rents and vacancy have stabilised after a sharp correction, maybe suggesting that a liking for more central offices near major transit hubs still rings true. 

To sum up, due to a somewhat frail economy, combined with the effects of flexible working practices reducing the need of office space, we predict that rents will continue to weaken heading into 2023 (Graph 4). At the same time, while vacancy levels in less convenient parts of the city rise, rates in prime areas and superior buildings should remain sound. As a result, we expect a slight loosening over the same period, although some tightening may emerge in 2022 as rents adjust to attract tenants.