Tokyo’s limited 2024 supply forecast to help stabilise the office market

The pipeline for this year is only a third of the 2023 level.

In a report, Savills said 2023 was a significant year for Tokyo’s new office supply, with a total GFA of nearly 450,000 tsubo completed over the year. 

With the Tokyo office market still in a recovery phase, many observers were initially concerned about a potential uptick in vacancies and general instability, especially because many new developments have high target rents. 

Here’s more from Savills:

However, Japan’s economic performance has been strong in 2023, and a number of companies have expanded their headcounts. At the same time, average vacancy has still been relatively loose in 2023, and some landlords have continued to offer generous incentives in order to quickly secure tenants. 

As such, many companies have seized opportunities to carry out overdue office relocations and consolidations throughout the year while premium space is available, which has eased many concerns among observers. 

This encouraging momentum bodes well for the market, and the limited supply forecast in 2024 should help to further stabilise the situation going forward. The pipeline of new office supply in 2024 comprises a total GFA of roughly 150,000 tsubo, which is around one third of the 2023 level, and pre-leasing activity has been encouraging so far at over 30% overall. 

New offices with good access remain highly sought after. In particular, the Shin-Tora Yasuda Building, scheduled for completion in February 2024, is reportedly fully pre-leased. Similarly, SHIBUYA AXSH, to be completed in May 2024, is reportedly nearly fully pre-leased, benefitting from the extremely tight market conditions in Shibuya, while over half of the TODA Building, to be completed in September 2024, appears to be filled. 

Not all new supply has been that fortunate, but the current pre-leasing trend hints towards overall stability and sound demand for offices with good access and ESG features. 

Sentiment among market players appears to be relatively positive with respect to the situation in 2024. According to a recent survey regarding Grade A offices in Tokyo by Nikkei Real Estate Market Report, over half of respondents predicted moderate improvements in vacancy in both 1H/2024 and 2H/2024. 

With regards to asking rents in 1H/2024, half of respondents predicted no changes, and nearly a fifth saw some rental growth potential, while for 2H/2024, the same proportion predicted no changes, and the proportion predicting rental growth increased moderately. 

Vacancy rates currently hover around the 1% level in Shibuya, Shinjuku, and Chiyoda, and the limited incoming supply in 2024 should not disrupt the situation. This appears to be a sign of overall market stability, and rental growth should be a distinct possibility in 2024. 

That said, a large expansion in office supply in 2025 may present further issues for the office market. Although leasing demand has been sound enough in 2023 to absorb incoming large supply with limited issues, which is another positive sign for 2024, the same is not guaranteed to occur in 2025. 

Like 2023, over 400,000 tsubo of office supply (GRA) is slated for completion in 2025, with a considerable amount contributed by the enormous Takanawa Gateway City complex in Minato ward. While the project has already generated some interest, with KDDI reportedly taking a large lease of almost 30,000 tsubo in the building, it remains to be seen how the remaining new supply is received, and the absorption of new properties may generate large amounts of secondary vacancies. 

In addition, global, and subsequent Japanese macro-economic instability in 2024 may threaten to dampen office leasing demand moving forward. Also, expected delays to the much awaited Chuo Linear Shinkansen project have not boosted prospects. 

The strength of leasing demand may change, depending on macroeconomic conditions, although new office supply may cause secondary vacancies elsewhere in the Tokyo office market, exacerbating bifurcation and contributing to further instability. That said, the office market has responded well to the uptick in new office completions in 2023, and pre-leasing activity among upcoming properties in 2024 has been sound. 

Indeed, the limited amount of new supply arriving in 2024 should bode well for the stability of the Tokyo market moving forward. New labour laws in 2024 surrounding the construction industry might also delay projects, and result in the staggering of supply. Overall, steady improvements in the office sector look encouraging.