Economy Indicates Only Gradual Recovery
The Bank of Japan‘s outlook for real GDP growth rate for FY2020 has been revised downward to -5.6%, 0.1 pp lower than the previous forecast. Total exports value in 2020 declined by 11% y-o-y, the third-largest drop after the GFC in 2009 (-33.1%) and the Plaza Accord in 1986 (-15.9%). Exports to China were strong, and total export value in December was up y-o-y for the first time in 25 months. However, global economic recovery is now expected to be slower due to the re-emergence of COVID-19. In Japan, Capex spending has stopped falling overall in recent month, although with variations among industries, and consumer spending has been under increasing downward pressure to face-to-face services.
Vacancy Rate Trending Up
Average Grade A office asking rent in Q4 2020 was JPY37,684, down 1.95% q-o-q. The overall vacancy rate rose 1.13 pp q-o-q to 4.22%, exceeding the 4.06% mark of September 2008. Minato Ward, with a concentration of office developments, saw the highest vacancy rise among the five wards of central Tokyo, up 3.49 pp y-o-y to 6%. The vacancy rate in Shinjuku Ward, a hub of SMEs and sales offices, rose 2.88 pp y-o-y to 4.53%, with the ward suspectable to economic shifts. In Shibuya Ward, vacancy edged up 0.34 pp y-o-y to reach 2.89%, still under the 3% mark but now expected to rise in the short-to-medium term, as the district’s concentration of IT firms expand remote working practices. Vacancy rises in Chiyoda and Chuo wards were limited compared to the other three wards, at 2.86% (+1.97 pp y-o-y) and 1.9% (+1.39 pp y-o-y), respectively. We expect the vacancy rate in the five central Tokyo wards to continue to trend up, with growing remote working practices and worsening financial conditions for firms combining to exert downward pressure on rental levels in high-vacancy areas.
Steady Shift in Office Demand Structure
The state of emergency was issued to 11 prefectures at the start of this year but leasing demand has remained stable since early last fall. With the business environment uncertain due to the impact of COVID-19, more firms are looking to downsize their existing space or to relocate to serviced offices. With short-term contract relocations, demand for furnished offices is rising with firms seeking to cut relocation costs. Shared office operators are experiencing rising pay-as-you-go membership and are expanding their market share into the suburbs. Many companies are planning to ride out COVID-19 by cutting fixed costs, and as the post-pandemic period comes into view they will review location strategies. Demand for office space is steadily changing shape, with flexible offices offering employees various ways of working expected to become mainstream in the future. Workplaces are now evolving into ecosystems that include multiple options such as home and third places, rather than a single location.
