Economic Recovery Held Back by Repeated States of Emergency
Japan’s GDP growth returned to negative territory for January to March, dropping to an annualized -3.9% q-o-q, with the suspension of the Go To domestic travel campaign and weaker consumption from a COVID-19 emergency declaration impacting performance. Tokyo has now endured a state of emergency every month in 2021: January 8 to March 21 in Q1, April 25 to June 20 in Q2, and now the current July 12 to August 31 period. Business bankruptcies are rising, especially in face-to-face industries such as F&B, hospitality, and food wholesalers. However, shopper traffic has remained quite resilient and retail sales are partially recovering. The outlook for face-to-face services will brighten if the government’s vaccination program picks up and the October / November target is realized, with services then set for a gradual recovery into 2022. As well, despite weakened consumption, exports are strong on the back of the recovery of overseas economies, and capital investment continues to recover.
Vacancy Rate at 7.5 Year High
Average Grade A office achievable rent in Q2 was at JPY36,773, down 4.67% y-o-y. The Tokyo Torch Tokiwabashi Tower project in Chiyoda Ward and Hibiya Fort Tower in Minato Ward launched in the quarter, achieving occupancy rates of 87% and 84%, respectively. However, although overall market leasing demand was strong, the trend of tenant downsizing continued. In Shibuya Ward, the relocation of DeNA and KDDI had a negative impact, sending the vacancy rate (actual and scheduled vacant space) to 7.05%, the steepest q-o-q rise among the central five wards by 3.44 pp. Minato Ward, with continuing new supply, saw the highest vacancy rate at 10.18%, while in Shinjuku Ward, vacancy grew to 9.7% compared to a pre-pandemic below 1% level. The weighted average vacancy rate in central five wards reached 6.88%, the highest level in seven and a half years.
Vacancy Edges Up with Increasing Downsizing Relocations
Leasing activity has continued to recover this year, but most relocations have been for downsizing. Hybrid work styles are expanding, and more firms are reducing floor space by introducing activity-based working. Original office space is shrinking, but the share of flexible office space is growing, and we expect this trend to continue. Building owners are certainly concerned about a collapse in rental levels, as in past recessions, and are now demonstrating more flexibility earlier in the leasing process, and this environment of undervaluation of higher-grade office space is helping a recovery in leasing demand. While new supply remains low this year and into 2022, vacancy rates will continue to rise slightly, with scant evidence of new office demand growth. In contrast, an influx of new supply is scheduled to enter the central five wards over three years starting in 2023.
In order to pursue higher market representation, we have changed the definition of Tokyo Grade A office into "5 wards in central Tokyo, completed after 2000, rental floor area of 6,000 tsubo or more, standard floorplate of 500 tsubo or more," and have newly added achievable rent and current vacancy rate.