Why Tokyo’s Grade A office sector could gradually improve in the coming months

Shibuya only recorded a minor correction of 0.5% in Q3.

The Grade A office market in Tokyo continued softening in Q3 2021. Rents declined 2.2% QoQ and 8.2% YoY to JPY34,400 per tsubo in Q3. According to Savills, vacancy rates increased at a slightly higher pace to what was seen in the previous quarter, with an uptick of 0.8 ppts QoQ and 1.8 ppts YoY to 2.5%. 

Despite these figures, Savills is still seeing some signs that market fundamentals could gradually improve over the next few months. 

Here’s more from Savills:

Looking at rental trends by submarket, QoQ declines slowed among the C5W this quarter, with the exception of Shinjuku. Furthermore, Shibuya only had a minor correction of 0.5% QoQ in Q3/2021, a major improvement considering the market’s sharp correction over the last year and a half. Similarly, although vacancies loosened this quarter, the increments were not as steep as Q2/2021. Minato was the only exception to this trend and largely underperformed compared to the other wards with an increase of 2.1ppts QoQ to 5.2%. 

Overall, demand for new buildings still appears to be sound. For instance, a Grade A building that opened this quarter, Kabuto One, with an NRA of 7,200 tsubo, appears fully occupied. Furthermore, other offices that opened earlier this year have continued to fill their remaining vacant space. In addition, although it was hard to find tenants for spaces larger than 100 tsubo until the last quarter, we are now seeing more movement in spaces up to 300 tsubo, indicating that the leasing market is becoming more active, albeit at a gradual pace. Some movements of large-scale tenants have also been reported. 

Looking ahead, no more large offices are set for completion in 2021, and only a few major buildings are expected to open in 2022. During this period of low supply, demand should have time to catch up and pick up the slack in the market. Moreover, improving corporate profits and the increased vaccination rate should help office demand recover. Some buildings scheduled to open in 2023 have already shown a decent start to their pre-leasing activity. 

Nonetheless, we continue to expect the office market’s recovery to be K-shaped, especially as secondary vacancy from last year’s large supply continues to materialise in the Grade A market. While well-located and new offices should remain stable, older offices with poor accessibility will suffer, thus affecting the market overall.