Why it’s not all doom and gloom for Tokyo’s residential market

Leasing demand is expected to get a boost as prices of for-sale condos increase.

Having seen a slight recovery in Q1/2021, Savills notes that average rents in the 23W are back in correction territory this quarter – slipping to levels not seen since Q1/2019. Despite this recent slump, the Japanese economy has been demonstrating some encouraging signs of recovery since Q3/2020, and the downward pressure that the pandemic has brought appears to have been somewhat alleviated. 

According to Savills, the overall downturn observed in the multifamily residential sector can be attributed to two key factors. Firstly, the lingering lukewarm market sentiment, and secondly, the demographic changes seen in Tokyo. Looking at the latter, the population of the 23W has clearly been negatively impacted by the pandemic, with many residents having moved out to neighbouring cities, including those in west Tokyo. 

Here’s more from Savills:

Unsurprisingly, the flexible work policies and lifestyle changes that have arisen from the pandemic appear to have had a significant influence in the increasing demand for larger apartments, which are considerably more affordable outside the 23W.

To that end, the residential market may see some further softening ahead. For instance, whilst the C5W maintains its popularity with current residents, smaller units that would have been occupied by employees moving to Tokyo have seen a drop-off in demand, as evidenced by the average size of rentable units in the area contracting. In addition, the significant increase in the number of listings after the peak moving season may suggest that market in Tokyo is weaker than expected. 

To make matters worse, this softening of demand will be joined by an upcoming increase in supply. Specifically, the number of rental condos started in the past few years has been increasing, and several rental condos built between 2019 and 2020 are likely to come online in 2021. To be sure, these newly built condos are likely to be popular, yet they will no doubt apply some downward pressure on the residential sector at large. 

Despite the gloomy backdrop, there remains some hope for the Tokyo residential market. For starters, the rental market should see a boost in demand as prices of for-sale condos continue to be stretched higher – itself driven by the increase in the purchasing power of dual-income households. Indeed, this is likely to have some legs considering that more widespread ESG policies should promote the participation of female professionals in the workforce. 

Meanwhile, despite some early teething issues for the national vaccination push, the Japanese government has significantly ramped up its efforts recently. This, coupled with the COVID-19 situation somewhat coming under control in many countries around the world, adds to the confidence that the end is near for the pandemic, and under this situation, some of the trends observed during the pandemic are likely to be reversed to an extent.