The Japanese economy has seen a rapid recovery since the end of the COVID-19 pandemic, with Tokyo’s real estate market also seeing positive changes. In addition to the demand for expansion due to improved business performance, companies that had returned their office space during the pandemic are now in  need of more space as their employees are coming back to the office. Even in the Tokyo office market, where rents have continued to decline over the past few years, rents in some areas and buildings are showing signs of recovery. The focus in 2024 will be whether this trend will become market-wide.

Grade A office rent in Tokyo’s Central 5-wards has fallen for 15 consecutive quarters as of December 2023.  Grade A rent reached its cycle peak in 2019 and continued to decline since the onset of COVID-19. However, the annual rental decline of -3.2% at the end of 2023 was smaller than JLL’s forecast.

However, the vacancy rate has shown a slightly more positive trend. During COVID-19, companies adopted work-from-home (WFH), returning excess office floors and causing an increase in vacancy rates. Facing a rapid increase in vacancy, some building owners lowered the asking rents, which saw an influx of tenants and an improvement in the vacancy rate.

Although the vacancy rate of the Tokyo Central 5-wards is currently 4.6%, Marunouchi/Otemachi has a tight vacancy rate of 2.1% due to demand from domestic companies for consolidation. In Roppongi/Akasaka, where foreign companies are concentrated, the vacancy rate has increased significantly due to the completion of large buildings, but recently there has also been an influx of tenants. In Shinjuku/Shibuya, demand from IT companies is strong, with a rate of 2.7%, below the average for the Tokyo Central 5-wards. In addition, the rents in Shinjuku/Shibuya rose 2.4% from the previous quarter, mainly due to the completion of large buildings, which pushed up rents (Chart 1).

Figure 1: Tokyo Grade A office market indicators

Source: JLL Dec 2023

Going forward, vacancy rates are expected to remain at the current low level due to the limited new supply in 2024. The supply and demand condition will likely improve throughout this year, although the outlook remains cautious due to the supply concentrated in 2025.

Looking ahead, given that new supply in 2024 is limited, rental decline is expected to slow further. Additionally, rents have already begun to recover in some properties and areas. If this trend spreads throughout the market, a recovery is expected in the Tokyo Central 5-wards market within 2024.

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