Flight to quality keeps net absorption positive

• ​​According to the Tankan Survey in December, the diffusion index of large manufacturers rose from 13 during the previous quarter to 14, the first rise in two quarters. The index of large non-manufacturers fell 1 point to 33.​
• Strong appetite for leases in both existing supply and pre-commitments were seen. Net absorption in the Grade A office market in Tokyo was 31,000 sqm in Q4. By industry, the figure was driven by information and communications, manufacturing and finance and insurance.

Vacancy rate falls below 3%

• No new Grade A office buildings were completed in Q4 2024.
• Tokyo’s vacancy rate in the Grade A office market in Q4 2024 averaged 2.8% and fell 30 bps q-o-q and 180 bps y-o-y. By submarket, the vacancy rate fell significantly in both Otemachi/Marunouchi and Akasaka/Roppongi.

Rents continue to rise for a fourth quarter in a row

• Rents in Tokyo’s Grade A office market averaged JPY 35,042 per tsubo, per month, up 1.2% q-o-q and 4.4% y-o-y by end-Q4 2024. Rents continued to increase in both Akasaka/Roppongi and Otemachi/Marunouchi, particularly in the latter.
• Capital values in Q4 rose 1.9% q-o-q and 7.3% y-o-y, supported by rise in rents and as cap rates are unchanged from Q3 2024. Notable transactions included Blackstone Group’s acquisition of Tokyo Garden Terrace Kioicho for JPY 400 billion, closing in 2025.

Outlook: Positive momentum is expected as rents and capital values are set to increase in 2025

• According to Oxford Economics’ forecast as of December 2024, expected GDP growth in 2025 is 1.2%, while the forecast for CPI in 2024 was unchanged at 1.6%. Risks include inflation, volatility in financial markets and political uncertainty.
• Leasing volumes in the next year are expected to outpace this year as the demand-supply balance remains tight and rent increases are expected to show no signs of abating. Capital values are expected to continue to rise with cap rates expected to remain at low levels.