Here’s what to expect from Tokyo’s office market for the rest of 2023

Analysts expect its present stable trajectory to continue.

Cautious optimism continues in the Tokyo grade A and large-scale grade B office market in 2023. Average rents for grade A offices increased modestly, while rental contractions for grade B offices were marginal over the quarter, according to Savills. 

Vacancy rates are low and look to remain stable across the C5W, despite some major additions in 2023 contributing to some moderate loosening in the market. 

Here’s more from Savills:

Indeed, the Tokyo office market has been supported by tailwinds in the form of strong Japanese corporate performance, particularly in export and some service industries, which should provide landlords with some certainty moving forward. 

The Tokyo office market has yet to recover from the shock of the pandemic, which has given tenants more choices at attractive rental levels when looking to relocate from their current premises. Average vacancy rates are still relatively loose, given that hybrid work arrangements remain a common company benefit, and the upcoming large new office supply will present more opportunities for tenants going forward. 

Indeed, many companies have recently carried out office consolidations, due to the greater choice of offices and more attractive leasing options, such as longer periods of free rent. While the rate of relocations appears to have largely recovered, modern offices in central areas with good transport access were the primary beneficiaries. 

On the other hand, prospective tenants have increasingly soured on opening offices in older buildings with poor access, given their difficulties in attracting talent in the current tight labour market. As such, some bifurcation persists in the market and such offices continue to struggle with high levels of vacancy. 

Nevertheless, we predict that the office market will continue on its present stable trajectory overall. The absorption of new major office supply across the C5W appears to have proceeded with limited issues given the sound demand for modern office space in Tokyo, which should be a silver lining for upcoming projects later in the year. That said, the poor performance of older properties is somewhat concerning, and some vacancies and secondary vacancies will likely materialise in 2023, particularly in areas with poor access. 

As such, observers may see some rental corrections and loosening of vacancy in these areas, which may affect respective submarket averages. That said, the lull in new supply in 2024 will likely ease this situation somewhat, which, in conjunction with strong corporate performance, will help the market absorb the large amount of new supply from this year.