Tokyo Grade A office rents rise for second quarter in a row in Q4

Rents in the central five wards grew by 0.5%.

In the Tokyo Grade A office market, Savills reveals that rental levels and vacancy have enjoyed modest improvements over the latter part of 2023, and sound domestic economic growth has been a tailwind for the office sector. 

For the second quarter in a row, a report by Savills reveals that average rents in the central five wards (C5W) experienced quarterly growth in Q4/2023 at 0.5% to JPY32,579 per tsubo, while annual rental changes amounted to a 0.6% decline, which is more modest than in the previous quarter. As such, the total rental contraction from the peak levels of Q2/2020 decreased marginally to around 13.9% for the Tokyo C5W Grade A office market. 

Here’s more from Savills:

Quarterly rental changes were moderate across the C5W over the past quarter, although some fluctuations were observed at the constituent ward level. Shibuya recorded the largest rental increment at 1.9% QoQ, and average rents in Shinjuku increased by 0.9% QoQ. Elsewhere, Chiyoda and Minato rents remained unchanged over the quarter, while Chuo was the only ward to experience a rental contraction at 0.2% QoQ. 

On a similar note, the average vacancy rate for Grade A offices in the C5W tightened modestly by 0.2ppts QoQ to 3.2%, and vacancy performance looks to continue to make gentle improvements, especially given the limited incoming supply in 2024. Chuo witnessed the largest quarterly decrease in vacancy by 0.8ppts to 6.1%, due to progress made across a handful of offices with moderate amounts of empty space in previous quarters. 

Meanwhile, vacancy rates fell in Shinjuku and Chiyoda by 0.3ppts QoQ and 0.1ppts QoQ, respectively. There were no changes over the quarter in Minato, while average vacancy loosened slightly by 0.5ppts QoQ in Shibuya, largely due to the addition of new offices that still have some available floors. However, the demand for new offices remains firm in Shibuya, and the submarket should have few problems dealing with remaining vacancies moving forward. 

2023 emerged as a favourable year for tenants, marked by multiple large leases ranging from 2,000 to 3,000 tsubo. The leasing landscape remains favourable for tenants, with rental corrections and enticing financial incentives. In addition, the market has slackened with greater rental floor flexibility, creating an ideal environment for prospective tenants. 

Hence, tenants have secured advantageous leasing conditions and have carried out overdue relocations in the recovering market, expanding or contracting their office footprints based on their revised needs in the post-pandemic landscape. 

Overall, this trend has been particularly welcoming for modern offices with strong ESG specifications, and located in areas with good access and amenities, which have garnered significantly heightened interest for relocations.

However, these pandemic-induced shifts have culminated in a noticeably bifurcated market. Hybrid work arrangements have persisted as a corporate perk, especially as firms navigate the severe worker deficit in Japan. In response, companies have been forced to reconsider the roles and functions of their offices. This often includes a focus on high-quality and specialised environments that support employee communication and well-being. 

Several older offices with poor access are likely unable to provide the same practical and psychological benefits, and so will be unable to compete, a situation that will be compounded by the large amounts of modern office space that arrived to the market in 2023, as well as the impending large supply expected in 2025. 

Overall, while the Tokyo office market should continue to improve, there will likely be winners and losers in the post-pandemic market, and fluctuations may intensify going forward.