Tokyo Grade A office vacancy rate breaches 1% mark for the first time in almost two years

Vacancies stood at 1.3% at end-4Q20, increasing 60 bps q-o-q and 80 bps y-o-y.

According to the Tankan Survey in December, the diffusion index of large manufacturers was -10, improving 17 points compared with the previous survey in September. This was an improvement for the second-consecutive quarter, yet levels remained low. The unemployment rate in November saw an improvement for the first time in five months, decreasing 20 bps m-o-m, reflecting 2.9%.

JLL reveals net absorption was -59,000 sqm in 4Q20, bringing the total for 2020 to 584,000 sqm. Negative absorption was registered for the first time since 3Q15, on the back of subdued demand for new leases and expansions given economic uncertainties, in addition to the low vacancy rate environment.

Vacancy rises in the Akasaka/Roppongi submarket

No new supply entered the market in 4Q20. In 2020, a total of 662,000 sqm came on stream and increased the total stock by 7%.

The vacancy rate stood at 1.3% at end-4Q20, increasing 60 bps q-o-q and 80 bps y-o-y. The vacancy rate rose above the 1% level for the first time in seven quarters. Vacancy crept up across the CBD submarkets, with Akasaka/Roppongi seeing the largest increase of more than 200 bps.

Rents decrease in line with the previous quarter

Rents averaged JPY 38,987 per tsubo per month at end-4Q20, decreasing -1.3% q-o-q and -2.2% y-o-y. Rents marked negative growth for the third-consecutive quarter with decreases observed across the CBD submarkets, and with Shinjuku/Shibuya decreasing by more than 2%.

Capital values decreased -2.8% q-o-q and -4.4% y-o-y in 4Q20. Capital values decreased for the third-consecutive quarter, reflecting negative rental growth. Cap rates were stable. In the investment market, J-REITs were active with notable transactions, including Nippon Building Fund’s acquisition of GranTokyo South Tower (comparted ownership) for JPY 47.0 billion or at a cap rate of 3.0%.

Outlook: Rents and capital values to see slight correction in 2021

According to forecasts provided by Oxford Economics as of December 2020, Japan’s real GDP was revised upwards to grow by 2.7% in 2021. The CPI was also revised upwards to fall only -0.3%. The economy is expected to pick up as socio-economic activities resume. Risks include the impact from the declaration of a second state-of-emergency on activities and uncertainties in the financial markets.

In the leasing market, given the subdued expansion demand, vacancy is expected to rise slightly. Accordingly, further rent correction is possible in 2021, especially in those submarkets that saw rent hikes. In the investment market, capital values are expected to be under downward 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.