Tokyo Grade A office rents’ deterioration finally starts to slow

The 1.9% decline in Q1 is a lot smaller than the 2.6% correction last quarter.

Tokyo’s Grade A office market continues to see a deterioration in rents as the outlook for the Japanese and global economies remains clouded, although there appears to be some optimism particularly in capital markets, according to Savills. While quarterly rents have declined 1.9% QoQ to JPY 35,762 per tsubo, the magnitude of decline is smaller than the 2.6% QoQ correction seen in the last quarter. 

Although the YoY rental decline still portrays a pessimistic image with the average rent in Q1/2021 shrinking 5.3%, it must be considered that this quarter’s drop was accentuated as Q1/2020 was the last quarter before the COVID-19 pandemic started affecting the market and was the strongest since 2008. Additionally, vacancy levels remain tight at 1.2%, only a 0.2ppts loosening from Q4/2020. Chiyoda showed particular resilience, experiencing a slight tightening both for QoQ and YoY changes. 

Here’s more from Savills:

At the ward level, Shibuya continued to perform poorly with rents dropping a staggering 8.7% YoY, although QoQ changes over the past two quarters show that the decline is slowing down. When analysing QoQ and YoY changes together, Shinjuku and Minato are the main perpetrators for the rental decrease for the C5W. Shinjuku showed particularly poor performance with a decrease of 3.3% QoQ. 

However, this drop in rent could be seen as a natural market correction. As the market softened and vacancies began to increase, rent levels in Shinjuku adjusted in line with the submarket’s overall building quality and age; in comparison, other wards have seen newer, state-of-the-art buildings enter the market. Minato followed closely behind Shinjuku with a quarterly decrease of 3.1%. The leading cause for the decrease is the high number of small and medium-sized enterprises (SMEs) in Minato. These companies are more vulnerable to market fluctuations and thus are more likely to adjust their leases in response to a poor financial environment. 

Taken as a whole, the C5W’s decline in rent is starting to curtail after the market began correcting in Q3/2020. Overall, there are signs of resilience, and although some new supply came to the market not fully leased, the overall market fundamentals remain sound. Encouragingly, traffic to workplaces currently stands at 75% of pre-COVID-19 levels, a significant improvement from the 40% levels observed during the initial lockdown in April 2020. 

Large-scale Grade B offices

Within the large-scale Grade B market, we saw a 2.1% reduction in rent QoQ to JPY27,275 per tsubo. Vacancy, on the other hand, increased 0.6ppts QoQ for the third straight quarter. As a result, for the first time since Q4/2017, vacancy levels have exceeded 2%. Fortunately, the premium Grade A offices have over Grade B offices has held steady about 31%. 

At the ward level, Chiyoda and Shibuya’s Grade B buildings both showed above average decreases in rent this quarter. As for vacancy, Chuo had the highest uptick this quarter, increasing 1.4ppts to 2.1%, with submarkets such as Harumi struggling to attract new tenants.