Tokyo’s Grade A office rents take a hit from pandemic woes, new office supply

Rents in the Tokyo central five wards fell 1.7% in Q2 2021. 

As demonstrated by the multiple large transactions seen this quarter, Savills says opportunities in the office sector remain sought after despite softening rental levels. The hospitality and retail sectors have been active, led by domestic corporate disposals intended to strengthen balance sheets. 

According to Savills, although assets in these sectors have been struggling, they have attracted the attention of investors optimistic about rapid economic recovery. The logistics and multifamily sectors continue to be regarded as essential components of pandemic-proof real estate strategies, although multifamily has shown signs of a slight softening. 

Here’s more from Savills:

There have been multiple announcements on data centre developments recently, demonstrating the robust interest in this emerging sector. Overseas investor appetite remains strong due to the attractive funding options and stability that Japan has to offer, and Goldman Sachs announced in May that it hopes to double its yearly Japanese property allocations to about JPY250 billion. 

The TSE J-REIT index was up 6.8% over the quarter and is only 4.4% shy of the pre-pandemic high of 2,250 in February 2020. Meanwhile, the TOPIX index continues to indicate bullish market sentiment. However, after reaching 30-year highs in March, its growth has paused over the past three months, probably due to the delayed start of vaccinations and stalled economic activity levels. 

By taking steps to keep interest rates low, the BOJ has maintained its loose monetary policies following a policy review in mid-June. That said, with Japan’s strong equity and bond markets, the BOJ has accelerated the tapering of its asset purchase program, which will help keep interest rates low for a longer period of time. 

Within the Tokyo central five wards, the Grade A office market has continued to soften with a rental contraction of 1.7% QoQ and 7.1% YoY to JPY35,157 per tsubo in Q2/2021. Rents have faced downward pressure derived not only from the pandemic, but also from the new office supply in 2020 which has resulted in vacancy created in older buildings when tenants move to newly-built offices. 

Specifically, vacancy rates saw an uptick of 0.6 ppts QoQ and 1.4 ppts YoY to 1.8%. Fortunately, a majority of the supply in 2021 has been filled or pre-leased, and the limited supply expected in 2022 should give the market some breathing space before the substantial volume of completions forecast for 2023.