ECONOMY: Tokyo’s Employment Recovery Continues Despite Rising Recession Ris
External risk factors are on the rise. The global economic outlook for 2023 was revised down again to +1.6%, along with the Japan real GDP forecast to +1.3% in 2022 and +1.1% in 2023. Tokyo's employment growth remains firm. In Q3 2022, Tokyo’sunemployment rate was 2.8%, unchanged q-o-q, but a greater number of male workers has lifted the labor participation rate by2.3% y-o-y to 67.2%, and the number of employed by 3.1% y-o-y to 836.5 million. This compares to the nationwide laborparticipation rate of 61.1%, with the net employment growth limited to 0.2 million. By industry, the Q3 2022 employee figure in theIT industry was 97,400, up by 16.2% y-o-y, or by14% from the end of 2019 or pre-COVD 19. Conversely, the Financial Servicessector, under increasing pressure from deteriorating capital market conditions, saw employment drop by 1,800 from the end of2019. Expect to see uneven employment recovery across industries to continue in the coming quarters.
SUPPLY & DEMAND: Net Absorption remains Negative ahead of Incoming Supply
In Q3 2022, the Grade A vacancy rate in the Central 5 Wards was at 4.6%, up 1.4 pp y-o-y, although availability was largelyunchanged, slipping 0.3 pp y-o-y to 7.3%. By submarket, vacancy rates rose in Kyobashi and Yaesu, as well as Iidabashi andKudan, with the delivery of large-scale office buildings. High-quality projects are attracting greater demand with lower rents, and theavailability rate in the Shinbashi and Shiodome areas has nearly halved from the peak of 27% in August 2021. Conversely,vacancy in the neighboring Hamamatsu-cho area rose to 11.8%, up 9.8 pp y-o-y. In the Tokyo Bay area, the availability rateremains high, tracking well above the high teens, even with strengthened incentives of 6-12 months rent-free. In 2023, new supplyis scheduled for the Toranomon, Mita, and Nishi-Shinjuku areas. With the quarter-end pre-commitment rate at 43.8%, we expectsoftening market conditions ahead, given that aggregate demand (net absorption) remains negative ahead of incoming supply.
PRICING: Narrowing Quality Premium is to Add Pricing Pressures on Lower Grade Buildings
The Grade A average assumed achievable rent (“rent “) declined 3.1% y-o-y to ¥34,370. The overall trend indicates a largerdecline in assumed achievable rent than asking rent. Effective rent, as adjusted for sales incentives such as rent-free periods,declined further in recent quarters. The widening gap among different rent categories suggests weaker demand than buildingowners perceive. By submarket, rents at Hamamatsu-cho/Onarimon dropped 10% y-o-y. Effective rent has also declined further inwider areas including Ginza, typically through the area's many old buildings. Overall, with ongoing discounts at high-gradebuildings leading to a narrowing quality premium, we expect increasing downward pressures at lower grade buildings ahead.
