Asian Cities - 1H 2024

S P OT L I G H T
Savills Research

Tokyo Grade B Offices

Tokyo Grade B Offices

Grade B offices in early stages of recovery
GRAPH 1: Percentage of Companies in Tokyo that Implement Remote Work, April
2021 to March 2024
REMOTE WORK IMPLEMENTATION RATE

70%
65%
60%
55%
50%
45%
40%
35%

M

ar-2430%

Source Tokyo Metropolitan Government, Savills Research & Consultancy

GRAPH 2: Percentage of Companies in Tokyo that Implement Remote Work by Numberof Employees, 2022 to 2024*
2022

100%

2023

2024

COMPANIES WITH REMOTE WORK

90%
80%
70%60%
50%
40%
30%
20%
10%

INTRODUCTION
The Tokyo office market has begun showing
signs of recovery after the downturn brought
about by the pandemic. As of Q1/2024,
average Grade B office1 rents and occupancies
have rebounded from their respective troughs
seen in Q3/2023 and Q3/2022. Indeed,
employers have more recently come to expect
greater office attendance. Furthermore,
corporations should now also have a clearer
idea as to the amount of office space theyrequire and are hence more likely to conduct
overdue layout changes.
According to a monthly survey conductedby the Tokyo Metropolitan Government, lessthan half of companies were implementing
remote work in March 2024, and thispercentage has gradually been on thedecline over the past few years (Graph 1).
Furthermore, as seen in Graph 2, larger
companies with more than 300 employees
were disproportionately more likely to offer
remote work options, with the opposite
true for smaller companies. Indeed, theproportion of SMEs implementing remote
work has decreased by a greater extent thanthat of larger companies. Since companies
with fewer than 300 employees are more
likely to be tenants of Grade B offices, theoverall market sentiment looks favourable.
Moreover, Japanese corporations have
performed very well, with corporate profits
and the employment rate showing strong
growth, most likely leading to greater
demand for office space.

0%
30-99

100-299
NUMBER OF EMPLOYEES

300 or more

Source Tokyo Metropolitan Government, Savills Research & Consultancy* Data was taken in March of each respective year

GRAPH 3: Large-scale Grade B Office Vacancy by Ward, Q1/2017 to Q1/2024
ChiyodaChuo

MinatoShinjuku

ShibuyaC5W Average

12%10%VACANCY

8%6%
4%2%2022

Q1Q32023

Q4Q1Q2Q3

Q4Q1Q2Q32021

Q4Q1Q2Q32020

Q4Q1Q2Q32019

Q4Q1

Q2Q32018

Q4Q1

Q2Q32017

Q4Q1

Q20%2024

Source Savills Research & Consultancy

savills.co.jp/insight-and-opinion/

2

LARGE-SCALE GRADE B OFFICES
The large-scale Grade B office market in theC5W is witnessing an early market upswing,supported by rising rents and declining
vacancies. As of Q1/2024, the average rent inthe C5W was JPY24,895 per tsubo, reflecting
a 1.7% year-on-year (YoY) increase, whilevacancy rates improved by 0.7ppts YoY
to 3.4%. However, bifurcation remains
prevalent in the Grade B office market.
Offices located in prime locations havefew vacancies and have even begun to see
rental growth in some cases. Conversely,
older offices in areas with poor accessibility
continue to struggle securing tenants,
despite considerable rental discounts.
Shibuya and Shinjuku observed thelargest rental growth over the past year,increasing by 3.0% YoY to JPY25,157
1 Grade A offices refer to buildings with a GFA of more than
9,000 tsubo (30,000 sq m) and a building age of less than 15years. Large-scale Grade B offices refer to buildings with a
GFA of more than 4,500 tsubo (15,000 sq m) and a building
age of less than 25 years. Some buildings that do not fit thesedefinitions are included.

Tokyo Grade B Offices

and 2.7% YoY to JPY23,429 per tsubo,respectively. Vacancy levels in Shibuya
have been tight since 2022, and also
decreased marginally by 0.2ppts YoY to1.5% in Q1/2024. Shinjuku also recorded adecrease in vacancy, falling substantially by
1.1ppts YoY to 2.5%. Elsewhere, Chiyoda has
overall been the best and most consistent
performer, recording the lowest vacancy of
1.0% and highest average rent of JPY27,816
per tsubo in Q1/2024. Overall, when taking
the relatively limited upcoming supply ofeven Grade A offices in these wards into
account, prospects appear positive, and themarket should keep improving.
However, Minato and Chuo have seen
lacklustre performance in comparison.
Despite a rental uptick of 1.8% YoY, Minato’s
average rents have descended to the lowest
position in the C5W, having been overtaken
by both Chuo and Shinjuku, at JPY22,975
per tsubo. Furthermore, despite improvingfrom its vacancy peak of 10.9% in Q3/2022,
its vacancy levels are still the highest in theC5W at 7.0%. The unfavourable situationin Minato was partially exacerbated by asignificant influx of new office buildings inrecent years, as well as the underperformancein some weak areas with non-ideal transport
access. Meanwhile, Chuo was the only
ward that recorded a decrease in rents onan annual basis in Q1/2024, dipping 0.3%
YoY to JPY25,081 per tsubo, and vacancy
levels remain elevated at 5.1%, albeit having
contracted nominally by 0.1ppts YoY.
The rental premium of Grade A offices
over Grade B in Chuo has narrowed fromRents and occupancies have
improved for Grade B offices ascorporate activity picks up. Prospects
for this class of office could evenbe more optimistic as an increasing
proportion of SMEs, the likely tenantsof such offices, are reportedly not
implementing remote work, signalling
greater demand for office space.

32.5% in Q1/2020 to 25.8% in Q1/2024, alongwith Shinjuku, and this may have enticed
some prospective tenants to consider
Grade A offices in the ward over Grade B
options. That said, the premiums are stilllarge enough to clearly differentiate typicaltenants. The market is particularly bifurcatedwithin these two wards; barring a handfulof exceptions, offices in prime locations aregenerally performing well with minimal
vacancies. On the other hand, offices in moreinconvenient locations are the source of thepreponderance of rental declines and empty
space. As such, the market is overall in good

shape, although a number of offices will
likely continue facing challenges.
Going forward, the positive momentumof large-scale Grade B offices should
continue to improve. Corporate profits
in Japan have increased by 13.0% YoY
in Q4/2023 according to the Ministry ofFinance, and the employment situation
appears to be proceeding smoothly, with theunemployment rate hitting rock bottom ataround 2.6%, which should continue driving
the demand for quality office spaces to givecompanies an edge in the fierce competition
for talent acquisition.

GRAPH 4: Large-scale Grade B Office Rents by Ward, Q1/2011 to Q1/2024
C5W Average

ChiyodaChuo

MinatoShinjuku

Shibuya

35,00031,00029,00027,00025,00023,00021,00019,00017,000
Q1

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

15,000Q3

JPY PER TSUBO PER MONTH

33,0002011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202320232024
Source Savills Research & Consultancy

3INVESTMENT TRENDS
Despite the ongoing uncertainties in theoffice market, investor interest in Grade B
offices remains strong. According to Savills
in-house survey, cap rates for Grade B
offices have remained unchanged at 3.4%
since Q4/2020, following an increase from
3.2% in Q2/2020. Meanwhile, investment
volumes in 2023 suggest that the interestof some investors has been diverted awayfrom offices to hotter sectors like sheds andbeds. Nonetheless, office assets in prime
locations offer stable yields with a wider
variety of value-add options. Hence, in anenvironment of heightened interest rates,
some capital could be expected to be shiftedback to offices. Indeed, offices with values ofgreater than JPY10 billion are limited, andhave continued to garner attention frominvestors, especially that of domestic andAsian capital.

Tokyo Grade B Offices

TABLE 1: Significant Office Transactions in Tokyo 23 Wards, Q1/2023 to Q1/2024

PROPERTY

WARD

PRICE(JPY BIL)

Prime Takanawa
Gateway

Minato32.1

Kasumigaseki Tokyu
BuildingChiyoda

30.6

Prime Takanawa
Gateway (FormerMinebeaMitsumi Inc.
Tokyo Headquarters)

MinatoHulic Ginza 7 Chome
Building

Chuo

Shinagawa Seaside TS
Shinagawa
Tower

CAP
RATE

BUYER

TRANSACTION
DATE

Undisclosed Daiichikosho

Feb 2024

3.2%

Activia
Properties Inc.

Mar 2023

25.0

Undisclosed

SPC ofLoadstar
Investments

Mar 2023

21.9

3.1%

Hulic

Apr 2023

16.1

3.4%

Sankei
Building

Jan 2024

Source Nikkei RE, J-REIT disclosures, Savills Research & Consultancy

GRAPH 5: Japan’s Investment Volumes by Asset Type, 2007 to Q1/2024
OfficeApartment

Dev Site

Hotel

Industrial

RetailSeniors Housing & Care87

JPY (TRILLION)

65OUTLOOKThe Tokyo large-scale Grade B office market
is improving in tandem with the Grade A
office market as Japan’s economy returns
to its growth trajectory. Vacancy rates havetightened for two consecutive quarters as ofQ1/2024, and rental trends are signalling anearly upswing.
Japanese corporations have performed
well overall, and increasing officeattendance, especially among SMEs - typical
Grade B tenants - is likely to create more
office demand. Tight labour markets andpositive trends for employee wellbeing
should accelerate this trend, as morecompanies intend to secure amenity-richworking spaces for their employees.
There is a large amount of new officesupply in the pipeline, but most of it isGrade A. In addition, significantly elevatedconstruction costs, as well as labour
shortages and further restrictions on
overtime work in the construction sector,
should make it more difficult to supply
Grade B offices. These new trends should
treat existing Grade B offices favourably.

432
10Source MSCI Real Capital Analytics, Savills Research & Consultancy

For more information about this report, please contact us
Savills JapanJon Salyards
Managing Director,
Institutional Investment Advisory+81 3 4330 3266
jsalyards@savills.co.jp

Savills Research
Andy Hurfurt
Managing Director,
Institutional Investment Advisory+81 3 4330 3328
ahurfurt@savills.co.jp

Tetsuya Kaneko
Managing Director, Head ofResearch & Consultancy, Japan+81 3 4330 3103
tkaneko@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Pacific+852 2842 4573
ssmith@savills.asia

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