Tokyo rents and vacancies rise

Tokyo office rents rose both YoY and MoM but vacancy increased for the fifth straight month to 2.77%. By area, Minato saw the largest vacancy increase (to 3.52% from 2.33%) and Chiyoda saw the smallest increase (from 1.39% to 1.93%). Inside we provide additional details by area and comment on investment implications (for Tokyu Fudosan, Mitsubishi Estate, and Sumitomo Realty).

According to the Miki Shoji office survey of 2,604 offices (28 new, 2,576 existing), Tokyo average office vacancy increased from 1.97% in June to 2.77% in July. New building vacancy decreased from 2.51% to 2.13% (improved) and existing building vacancy increased from 1.95% to 2.79% (worsened).

Tokyo average rents of ¥23,014/tsubo were up 6.23% YoY and 0.59% MoM. New building rents were up 7.75% YoY and 0.26% MoM and existing building rents were up 6.49% YoY and 0.75% MoM.

The vacancy continues to rise but rent growth remains firm at 6.2%. Vacancy is a 12-18 month leading indicator of rents, so we should begin to expect rent growth rates to decline and eventually go negative by 2021.

Jefferies Equity Research notes that they are concerned over the potential for weaker vacancy for some time. “As Japanese corporate earnings deteriorate from COVID it is reasonable to expect vacancy to increase. The market hopes that earnings eventually recover, reversing the downward pressure. We share that expectation.”

“We argue that there has been consolidation of offices among the bigger players, who have leasing and balance sheet advantages. We think that, despite weaker overall market trends, there may be an ongoing process of continued consolidation, with larger players taking more market share. It can be argued that despite general weaker Tokyo office trends that vacancy increases may not be as severe at Mitsui Fudosan or Mitsubishi Estate for example.”