The vacancy rate for office space in the five central Tokyo wards was 6.46% as of July, reflecting a trend toward office consolidation in order to achieve a balance between working from home and going to work.

Demand for office buildings in central Tokyo is slowing. While a number of large buildings are opening, the vacancy rate is approaching a 10-year high of more than 6% due to the establishment of telecommuting and business reviews by foreign-affiliated firms. Rents have dropped in some areas by about 30% from three years ago.

According to office brokerage Miki Shoji (Chuo-ku, Tokyo), the office vacancy rate in the five central Tokyo districts (Chiyoda, Chuo-ku, Minato-ku, Shinjuku-ku, Shibuya-ku) was 6.46% as of July. This was the 30th consecutive month in which the oversupply rate exceeded 5%, which is considered a guideline for oversupply. Osaka and Nagoya are at 4.6% and 5.5%, respectively, and other regions are also above the pre-COVID-19 level.

“It’s a miracle we were able to open with full beds.”

A real estate company executive talks about Mitsui Fudosan‘s “Tokyo Midtown Yaesu” (Chuo-Ku, Tokyo), which opened in March. This is because a large supply of large office buildings, including Mori Building‘s “Toranomon Hills Station Tower”(Minato-ku) and “Azabudai Hills” (Minato-ku), will be built in 2023, and demand is expected to weaken, making it difficult to attract tenants.

According to a Mori Trust survey, the supply of office buildings with a total floor area of 10,000 square meters or more in the 23 wards of Tokyo is expected to reach a three-year high of 1.3 million square meters in 2023, 2.7 times the level of the previous year on an area basis. An additional 1.41 million square meters will be supplied in 2025.

“Businesses are less likely to be looking for office space than they were in 2022.” Weak demand is a concern for Kohei Kawai, Research Director & Head of Colliers International Japan (Chiyoda-ku, Tokyo), a leading real estate service provider.

In the background is a certain degree of telecommuting. According to a Tokyo Metropolitan Government survey, the telework implementation rate among companies in Tokyo exceeded 45% in July. This is down from the peak of over 60%, but well above the March 2020 level (24%) before the COVID-19 expansion.

Large companies are consolidating their offices so that they can both come to work and work from home.

LIXIL, a major housing equipment supplier, will also relocate its headquarters in November 2022. The office area was reduced slightly UNDER 90% by adopting a free-address system with no fixed seating. In July 2022, NTT will make home the principle place of work for employees, and has been consolidating offices, mainly in urban areas, in line with the expansion of telework.

The momentum of foreign-affiliated companies, which have supported demand for office space in central Tokyo, has also slowed. Deloitte Tohmatsu Group will downsize its offices in 2021. US IT giants are proceeding with a series of workforce reductions in the US and abroad. “In Japan, we have been reevaluating our occupancy schedule and reducing the size of our offices”(Sanko Estate, Chief Analyst).

In the midst of structural changes in demand, major real estate agents are focusing their wisdom on attracting companies to reside in the area.

Mori Building succeeded in attracting foreign companies, law and accountancy firms, and consulting firms by putting in an international school and preventive medicine facilities at Azabudai Hills.

Mitsubishi Estate and Mitsui Fudosan subdivided the floors into smaller units, allowing for short-term contracts. It will be furnished and equipped to facilitate move-ins and move-outs and attract start-ups and departments in charge of new businesses from large corporations.

The supply of new large office buildings by major real estate companies is taking away demand from small and medium-sized buildings. According to Colliers International Japan, the average rent in the Shinagawa/Konan area, which is home to many small and medium-sized offices, was 24,800 yen per tsubo (3.3 square meters) in April-June, down about 10,000 yen from three years ago. Price reductions are also continuing in order to secure tenants. Industry insiders noted, “Even in central Tokyo, small and medium-sized office buildings within a 10-minute walk of the station are seeing a decline in the number of occupying firms.”

On the other hand, as rents decline, it will also provide an opportunity for startups that have had difficulty setting up offices in central Tokyo to relocate to the city center.

According to Tokyo Shoko Research, the number of bankruptcies in the real estate industry remained above the year-ago level for eight consecutive months through June. Miki Shoji and the Japan Real Estate Institute predict that the vacancy rate in the city’s five central districts will deteriorate to 7.2% by 2027. If vacancy rates continue to rise and rents continue to fall, there could be a shakeout, particularly among small and medium-sized companies. As the shakeout progresses, prime properties and tenants will be concentrated in the hands of the larger companies that are stronger.

In the US, where vacancy rates are higher than in Japan, there is a movement to convert offices into residences. A similar trend could occur in Japan if vacancy rates rise further.