Tokyo office rents to peak in 2017?

A vacancy rate of 5% is said to be the line between a landlord’s market and a tenant’s market. According to Miki Shoji, the vacancy rate in Tokyo’s central five business districts in July 2015 was 4.89%, down 0.23 points from June and down 1.31 points from last year. Shibuya-ku has the lowest vacancy rate of 2.27%, down 1.82 points from last year. CBRE reported that the all-grade vacancy rate in July 2015 was 3.3% in the 5 wards and 3.6% across the 23 wards. During the mini-bubble in 2007, the vacancy rate across all wards dropped to just 1.2%, while monthly rents reached a peak of 52,350 Yen/Tsubo (15,863 Yen/sqm).

Marunouchi remains the prime office location, and Marunouchi’s landlord – Mitsubishi Estate – is currently enjoying a vacancy rate of just 1.8%.

With renewed confidence in the economy, vacancy rates have again improved, while office rents have increased to a current average of 33,600 Yen/Tsubo (10,181 Yen/sqm), up from 29,050 Yen/Tsubo (8,803 Yen/sqm) seen during the market bottom.

Demand from companies seeking to rent entire floors is thought to be a driving force behind the rising rents. Companies are starting to group divisions and departments into one building or one floor, rather than having various smaller office locations.

Rents are expected to continue to rise for the time being. CBRE has forecasted Grade A office rents to increase by as much as 20% between 2015 and 2017.

However, rising rents have been limited to prime buildings in top locations. As companies shift to bigger and better locations, the owners of older buildings are having difficulty increasing rents.

The outlook for 2017

Real estate analysts are cautious about the second half of 2017. A large supply of new office space in 2016, coupled with an increase in the consumption tax rate in April 2017, could lead to a slowdown in the economy.

The effects might be limited to certain areas. The areas around Shibuya and Shinjuku Stations are suffering from a shortage in supply due to a limited number of potential development sites and growing demand from the IT industry, while a several large-scale development projects in Minato and Chuo-ku may possibly saturate the market.

Sources:
CBRE Press Release, August 10, 2015.
Miki Shoji Office Report, August 2015.
Toyo Keizai, August 1, 2015.

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