Tokyo Office Rents Inched Upward in Q1 as Tenants Seek Upgrades

Tokyo’s office market continues to defy the global deskspace doldrums with rents expected to continue rising and vacancy to remain tight for the rest of 2024, signaling further strength for one of Asia’s hottest real estate investment destinations.

Average Grade A office rents in Tokyo’s central wards rose 0.2 percent to JPY 32,656 per tsubo ( 3.3 square metres or 35.5 square feet) in the first quarter from the preceding three months, and were up 0.3 percent from the same period a year earlier, according to Savills.

Vacancy also edged lower to 3.5 percent last quarter as demand outstripped new supply, with occupiers taking up a net 162,645 square metres in the five wards, which was equal to twice the 80,000 square metres of new supply that came on stream during the period, data from Colliers showed. The property agency expects leasing to continue outpacing new supply for the rest of the year as tenants snap up quality space to attract talent.

“In 2024, it is expected that the combination of reduced new supply from the previous year and consistent demand will sustain the downward trend in vacancy rates and the upward trajectory in rents,” Colliers said. “As the competition for talent increases and office attendance rebounds, demand for prime, high quality space grows.”

Flight To Quality Persists

Despite the first quarter uptick, Tokyo prime office rents remain 13.7 percent below their previous peak in the second quarter of 2020 before the pandemic disrupted corporate operations and promoted remote work arrangements.

Savills called the climb in leasing rates over the past year a sign of stability in the market, with Minato booking the highest rental growth among the five wards with a 0.5 percent quarter-on-quarter increase. The area, which is home to headquarters for major corporations including Honda, Mitsubishi Motors, NEC and SoftBank Group also had the sharpest drop in vacancy, shedding one percentage point to 5.1 percent in the first quarter.

Chiyoda saw 0.3 percent rental growth and Chuo a 0.2 percent increase to rank next among the central wards, while the markets in Shibuya and Shinjuku remained flat.

The rising rents and falling vacancy in central Tokyo come after 58 percent of businesses surveyed by Mitsubishi Real Estate Services in January said they were looking to expand their offices to accommodate growth and higher headcount, while also hoping to upgrade the quality of their workplaces.

“The bifurcation between newer modern offices with good transport access, and older, inconvenient offices persists,” Savills said. “Tenants looking to relocate or expand their office footprints increasingly prefer new buildings with useful amenities to attract and retain their workforce, especially with scarcer skilled resources.”

For the full year of 2024 Colliers expects tenants to take up a net 401,650 square metres in Tokyo’s five central wards, which would outstrip the estimated new supply of 302,480 square metres by 33 percent. In response, the property consultancy predicts grade A office rents in the area will rise by 3 percent by the end of this year, compared to end-2023, as vacancy falls to 3.4 percent.

That dynamic is likely to shift as the market heads into 2025, however, as the company predicts net take-up of grade A office to average 317,025  square metres per year from 2025 through 2028 – some 27 percent below this year’s leasing.

Top Office Investment Market

Tenant demand for Tokyo workplaces correlates with investor acquisitions of office assets with JLL pointing to Japan as the most active office market in Asia last quarter.

In February, Goldman Sachs Asset Management agreed to pay JPY 41.2 billion to buy a set of floors in the GranTokyo South Tower near Tokyo Station from Nippon Building Fund, a REIT sponsored by developer Mitsui Fudosan.

During that same month Germany’s Union Investment announced the sale of a pair of office assets in Tokyo, the Shibuya Prime Plaza near Shibuya station and J6 Front, an office and retail building near Harajuku station.

The Tokyo office acquisitions have continued into this quarter with Hines purchasing a building in Shinjuku’s Yoyogi area last month from a joint venture between Japanese property giant Mitsubishi Estate and Sumitomo Mitsui Finance and Leasing Co (SMFL).