ECONOMY: Tokyo’s Employment Recovery Closing on Pre-COVID level
Tokyo’s overall office employment level remains on a positive trajectory. Employment grew by 95,000 y-o-y in Q4 2021, with the city’s unemployment rate falling by 0.6 pp y-o-y to record 2.4%. Growth was chiefly attributed to the Technology sector, representing an increase of 90,000 y-o-y. Nationwide, the Q1 2022 unemployment rate recorded a modest 0.1pp y-o-y fall to 2.7%. Positively, nationwide employment in the Information & Technology sector grew by 100,000 y-o-y, meaning a jump of 370,000 from March 2019. Professional services also recorded an increase of 90,000 y-o-y, marking a rise of 250,000 from March 2019. In contrast, the Retail & Wholesale sector has now recorded a fall of 200,000 from March 2019, as has the Manufacturing sector. We expect this uneven degree of employment recovery across major industries to continue in the coming quarters.
SUPPLY & DEMAND: Mixed Demand Across Submarkets with No New Supply During the First Quarter
Tokyo’s C5W Grade A office building vacancy rate declined by 0.7pp q-o-q to 3.0%, still representing an increase of 1.6 pp y-o-y. Some large-building owners have started to reduce discounts in their asking rents, leading to an elevated vacancy rate in certain areas. By submarket, Shinbashi/ Shiodome recorded a vacancy rate increase of 16.7 pp y-o-y to 17.5%, slightly below the peak of 19.3% recorded in Q4 2021. Roppongi recorded a notable fall in vacancy, down 1.6 pp y-o-y, to 3.5%, reflecting sizeable take-up, mostly through short-term lease contracts. Shibuya reported a vacancy drop of 0.5 pp y-o-y, marking near-full occupancy of Grade A office properties. Flight-to-quality trends, in favor of newly built and amenity-rich buildings, has been evident through higher pre-commitment rates at incoming supply due over the next two years. The pre-commitment ratio of incoming supply for 2022 and 2023 has risen to 48.7% and 27.5% respectively, partially offsetting new supply volume concerns from 2023 onwards.
PRICING: Diminished Locations’ Appeal Reflected in Larger Asking Rent Discounts
Tokyo overall average assumed achievable rent declined 4.8% y-o-y to JPY34,678 per tsubo per month1 equivalent to $8.22 per square foot per month (psf/mo). Most large office buildings still offer above-average rent discounts to minimize vacancy risk. With large building asking rent reduced by more than 15% from one year ago, Hamamatsu-cho recorded a notable rent decline of 9.3% y-o-y to JPY29,724 ($7.05 psf/mo). Shinagawa Konanguchi recorded a similar fall of 7.9% y-o-y to JPY28,541 ($6.77 psf/mo), driven by a series of large asking rent discounts in excess of 10%, leading to the area’s rent now priced at 15.4% below the Q4 2019 level. Roppongi saw a softer drop, down 3.3% y-o-y to JPY35,798 ($8.49 psf/mo) after recording the steepest decline in Q3 2021. While the area’s rent continues to trend down, the slide is less than the Tokyo C5W average rent decrease at 4.8% y-o-y.