ECONOMY: Tokyo’s Employment Recovery Continues, Adding 270,000 Jobs in Past Four Years
Higher interest rates for a longer period combined with elevated geopolitical tensions are expected to aggravate the likelihood of global stagnation at least through the first half of 2024. Despite an expected uplift to the real GDP growth rate towards 2% in 2023, Japan’s economic growth is projected to fall to less than 1% in 2024, hobbled by the delayed effects of a global slowdown along with lackluster recovery in key exports such as semiconductors. More positively, Tokyo's employment figure continues to improve. While nationwide total employment has slightly increased by 280,000 over the past four years, Tokyo’s total employment has grown by 270,000 over the past four years. By industry, the technology sector has gained 231,000 jobs, while the wholesale and retail trade has lost 10,000 positions, both from the baseline figures as of Q2 2019.
SUPPLY & DEMAND: Modest Vacancy Uptick Attributed to Submarkets With Ample Supply
The Tokyo Central 5 Wards Grade A office vacancy rate increased 0.7 pp y-o-y in Q3 to record 5.1%, with the availability rate remaining flat at 7.1%. Excluding the impact of new office entrants in the past 12 months, vacancy at existing stock declined by 1.1 pp y-o-y to 3.4%. Tokyo’s office attendance rate remains stable, at around 70% of the baseline recorded in 2019. In turn, tenant demand for new or renovated properties has stiffened, with notable growth in client inquiries. While we alert on delayed negative impacts from large new entrants, the overall net absorption trend remains stable, limiting an expected uptick of the overall vacancy rate at a modest level. Occupancy was at 63.1% for newly completed buildings in Q3 (NLA:5.6msf) and projected at 43.5% for incoming projects within the next twelve months (NLA: 3.5 msf). Some landlords are now choosing to pursue higher rents over prolonged vacancy, but most still prioritize full vacancy by offering flexible rental terms in response to the ample supply. Ahead, incoming supply is scheduled to double from the 10-year historical average in 2025, leading to probable delays in tenant relocation decisions.
PRICING: Lower Rent Pricing Ensures Minimal Vacancy Rise Across Grade A/B Properties
The Tokyo C5W Grade A average assumed achievable rent ("rent”) softened by 0.7% y-o-y in Q3 2023 to record ¥34,335, with a corresponding decline in asking rent, down 0.9% y-o-y. We believe the pace of the rental fall bottomed in 3Q 2021, when the assumed achievable rent fell by 4.7% y-o-y and the asking rent by 4.0% y-o-y. We expect delayed downward rental pressures to fill vacancies in existing buildings to increase, following tenant relocations to newer Grade A properties, but the negative impact in relation to the Grade A office inventory of 2.8 million tsubo, is likely to be limited. Given the pricing adjustments required in transitioning into the first inflationary environment since 1990, we expect near-flat rental movements at least until the end of 2024.