Tokyo office rents still on a downtrend for nearly two years now 

Office rents declined for the seventh consecutive quarter in 4Q21.

By the end of the fourth quarter of 2021, Tokyo office rents averaged JPY 36,274 per tsubo per month, reflecting a 1.8% q-o-q and 7.0% y-o-y decline. 

JLL says this is the seventh consecutive quarter of decrease but its pace slowed slightly compared with the previous quarter. The market consistently saw negative growth, including the major markets of Otemachi/Marunouchi, Akasaka/Roppongi and Shinjuku/Shibuya.

Here’s more from JLL:

Capital values increased 1.2% q-o-q , turning positive for the first time in two quarters, yet decreasing 4.0% y-o-y in 4Q21. The increase reflected cap rate compression; net effective rents continued to decrease. Notable transactions in the quarter included Japan Real Estate’s additional acquisition of Otemachi Financial City (co-ownership) for JPY 6.38 billion and an NOI cap rate of 3.6%.

Negative net absorption continues

According to the Tankan Survey in December, the index of large manufacturers was 18 − stable compared with the previous survey in September. This reflected recovering sentiment from the impact of COVID-19, offset by surging raw material prices. The figure for non-manufacturers was 9 points, increasing 7 points from the previous survey and marking the highest level since December 2019.

Net absorption was a negative 41,000 sqm in 4Q21, as demand from industries, including Wholesale and Retail trade, Information & Communications and Financial services, were offset by small-size cancellations and fewer contract renewals. For the full-year 2021, net absorption totalled a negative 51,000 sqm, registering negative levels for the first time since 2008.

Vacancy rate continues to creep up

No new supply entered the market in 4Q21.

The vacancy rate stood at 3.5% at end-4Q21, increasing 40 bps q-o-q and 260 bps y-o-y. The vacancy rate rose for the eighth consecutive quarter, due in part to the accumulation of small-size cancellations as well as fewer contract renewal activities across most of the market.

Outlook: Rents to fall but capital values to increase in 2022

According to Oxford Economics as of December 2021, Japan’s real GDP growth forecast was revised upwards to grow by 3.2% in 2022; the CPI was also revised upwards to grow by 0.6% in 2022. The economy is expected to pick up on the back of recovering domestic activities and overseas economies. Risks include the surge of raw material prices.

In 2022, the vacancy rate is expected to rise due in part to the accumulation of cancellations, although it is expected to remain relatively low, near the 4% level. Rents might see further corrections as landlords appeal to tenants. Capital values may experience increases, reflecting cap rate compression.

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