New supply of Grade A office buildings in Tokyo's central five wards will remain healthy in the next five years, with the majority of supply coming from the Minato Ward and more than 30% from the Chuo Ward.
We expect a steady influx of new office supply into central Tokyo to continue. Many office buildings scheduled for completion over the next five years are large-scale redevelopment projects or replacements of older office buildings. However, pre-leasing rates have fallen compared to recent years. In 2020, despite a larger amount of new office supply, many newly-built properties were almost fully leased before completion. In 2021, some new completions had vacant floors, reflecting weakened demand. The pre-leasing rate for buildings scheduled to complete in 2022 is even lower than buildings completed in 2021. Changes in occupier demand are a factor. In 2019, vacancy rates were at record lows and large blocks of space for large companies to consolidate their operations were only available in new buildings. At present, however, the trend towards hybrid-working and decentralisation of office space means less demand for large spaces. As a result, Grade A buildings with large floor plates, including newly-constructed buildings, are preparing to divide their floors into multiple sections to attract tenants.
・Five-year new supply trend to continue
・We expect the new office supply volume to be heavily concentrated
・Office development projects are handing over with lower occupancy
Insights for investors/landlords
Investors/building owners will need to pay attention to the supply-demand gap after 2023. The rapid rise in vacancy rates since 2020 appears to have slown down, partly due to the relatively low level of new supply in 2021 and 2022. But as supply will increase from 2023 onwards, some submarkets may face an increasing supply-demand gap from the second half of 2022 onwards, as tenant leasing activities for these buildings begin.
Insights for occupiers
Occupiers will have a wider choice of offices to move into. Newly constructed large buildings, which generally have been leased on a floor-by-floor basis, are now welcoming small and medium-sized tenants by dividing their floors before construction is completed. There will be opportunities for relatively small and medium-sized occupiers to move in those newly developed offices. This emerging trend may enhance pre-commitment levels in buildings completing in 2022