APPD Market Report Article


February 28, 2023

Takeshi Akagi, Head of Research, Japan


JPY 34,660


Net absorption mostly in line with the previous quarter

  • According to the Tankan Survey in December, the diffusion index of large manufacturers was 7, decreasing for the fourth consecutive quarter in response to high raw material costs and increasing uncertainty. At 19, the index of large non-manufacturers continued to pick up, increasing for the third consecutive quarter as the flow of people continued to improve. 
  • Net absorption totalled 44,000 sqm in 4Q22, a healthy level mostly in line with the previous quarter when new supply entered the market. Demand came from industries that included manufacturing, information and communications and construction. For the full year, net absorption totalled 98,000 sqm, compared with negative 49,000 sqm in the previous year. 

Vacancy rate declines almost across the market

  • No new supply entered the Grade A office market in Tokyo in 4Q22. For the full year, stock increased by 1%, with the sole completion being The Tokyo Midtown Yaesu Central Tower in 3Q22.
  • The vacancy rate declined to 3.7% at end-4Q22, decreasing 40 bps q-o-q and increasing 20 bps y-o-y. A decrease was seen for the first time in two quarters as vacancy decreased in almost all submarkets across the CBD, partly in response to lowered rents.

Capital values increase as cap rates compress further

  • Rents averaged JPY 34,660 per tsubo per month, at end-4Q22, decreasing 1.0% q-o-q and 4.5% y-o-y. This marked the eleventh consecutive quarter of decrease. The pace of decline softened slightly compared with the previous quarter in submarkets that included Otemachi/Marunouchi and Akasaka/Roppongi.
  • In 4Q22, capital values increased for the first time in two quarters, up 3.3% q-o-q and 2.6% y-o-y. The increase, despite a rental decline, was due to cap rate compression for the first time in three quarters. Grade A office transactions closed in the quarter included Otemachi Place (strata title) acquired by Hulic from The Government of Japan for JPY 436.4 billion.

Outlook: Rents and capital values expected to decrease

  • According to Oxford Economics as of December 2022, Japan’s real GDP growth and CPI forecast were 0.9% and 1.4% in 2023, respectively. The downside risks included the slowdown in overseas economies. The BOJ increased interest rates when it announced it would widen the range of the long-term JGB, but the impact on the real estate market is expected to be limited for the foreseeable future. 
  • The vacancy rate is expected to rise slightly in the next 12 months as relatively major new supply enters the market. This is expected to place downward pressure on rents. In tandem with the decrease in rents, capital values are expected to decline.

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

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