Tokyo office vacancy rate rises for the first time in two quarters

It increased 40bps to 3.4% in Q2.

The vacancy rate in Tokyo’s Grade A office market increased 40 bps q-o-q to 3.4% in 2Q22. According to a JLL report, the vacancy rate increased for the first time in two quarters. 

Otemachi/Marunouchi saw an increase of more than 100 bps q-o-q, while Akasaka/Roppongi saw a decrease of 50 bps q-o-q.

Here’s more from JLL:

According to the Tankan Survey in June, the index of non-manufacturers outperformed manufacturers for the first time since December 2020. This reflected the receding impacts of the spread of COVID-19 on non-manufacturers and surging raw material prices on manufacturers.

Net absorption recorded at -35,000 sqm in 2Q22, turning negative for the first time in two quarters on the back of increasing vacancy and no new supply additions. On the other hand, tenants from industries including manufacturing, information and communications, and finance and insurance took advantage of lower rents to secure high-quality space as well as committing to upcoming supply.

Capital values increase reflecting cap rate compression

Rents averaged JPY 35,415 per tsubo per month, at end-2Q22, decreasing 1.2% q-o-q and 5.9% y-o-y. This marked the ninth consecutive quarter of decrease. The pace of decline was mostly in line with the previous quarter. Decreases in rents were observed, in particular, for submarkets where a number of buildings hold above-average vacancy.

Capital values increased 2.6% q-o-q and decreased 0.7% y-o-y in 2Q22, turning positive for the first time in two quarters, reflecting cap rate compression as rents continued to decline. Notable transactions confirmed in the quarter included a SPC with Taisei, Fuyo General Lease and Development Bank of Japan as equity investors acquired Otemachi Nomura Building (ownership portion) in March.

Outlook: Rents expected to bottom out in 2022

According to Oxford Economics as of June 2022, Japan’s real GDP growth forecast was revised downwards to grow by 2.0% in 2022; the CPI was revised upwards to 2.1% in 2022. The economy is expected to pick up as socio-economic activities normalise. Risks include supply-side constraints and persistent geopolitical risks.

The vacancy rate is expected to rise slightly in 2022, although it remains relatively low at less than 4%. Rents are expected to bottom out and turn around on the back of limited space for further correction and as the pre-commitment rate of future supply continues to increase. Capital values will likely remain stable as cap rates are also expected to remain stable.

Note: Tokyo Office refers to Tokyo's 5 Kus Grade A office market.