APPD Market Report Article


September 4, 2023

Takeshi Akagi, Head of Research, Japan


JPY 33,923


Further increase in net absorption as new supply stimulates demand

  • According to the Tankan Survey in June, the diffusion index of large manufacturers recorded at 5, the first increase in seven quarters as the rise in raw material costs eased. The index of large non-manufacturers continued to pick up, reaching 23 and increasing for the fifth consecutive quarter as economic recovery continued.
  • As major new supply stimulated demand, net absorption in the Grade A office market in Tokyo totalled 188,000 sqm in 2Q23, equivalent to 192% of 2022’s full-year figure, due to several large-scale new projects. This figure was driven by information and communications, finance and insurance, and manufacturing.

Completion of large-scale supply pushes vacancy rate higher

  • Two Grade A office buildings entered the market in 2Q23, increasing the stock by 2.5% q-o-q. These included Tamachi Tower and Azabudai Hills Mori JP Tower. The schedule of new supply for full-year 2023 is the second largest volume since JLL started tracking it, and more than 40% of it was completed in the quarter.
  • Tokyo’s vacancy rate in the Grade A office market averaged 4.8%, increasing 60 bps q-o-q and 140 bps y-o-y. This was the second consecutive quarterly increase, in part reflecting the remaining vacancy in newly-supplied buildings. Looking at submarkets, the vacancy in Akasaka/Roppongi increased sharply. 

Decline in average rents continues

  • Rents in Tokyo’s Grade A office market averaged JPY 33,923 per tsubo, per month, at end-2Q23, decreasing 1.1% q-o-q and 4.2% y-o-y, respectively. Rents fell for the 13th consecutive quarter in all submarkets. The rate of decline was mostly in line with the previous quarter.  
  • Capital values in 2Q23 fell on a y-o-y basis for the first time in four quarters, down 2.1% y-o-y and 1.5% q-o-q, marking the second consecutive quarter of decrease. This reflected negative rent growth as cap rates remained stable. There were no Grade A transactions in the quarter.

Outlook: Cap rates stable, rents and capital values to decline gradually

  • According to Oxford Economics’ forecast as of June 2023, the GDP growth for 2023 was upgraded to 0.8% and the CPI to 2.8%. Risks include the downturn in overseas economies, inflation and volatility in the financial markets.
  • Leasing volume is expected to slow down in the second half of 2023 since the largest project in the pipeline was completed in the quarter. The vacancy rate is expected to gradually increase over the rest of this year, which will put downward pressure on rents. Capital values are projected to fall as rents decline and further compression of cap rates is limited.

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

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