Our Main Scenario for Tokyo Office Market Stays, Despite Slightly Better-Than-Expected Vacancy Trend

In the five central wards that comprise Tokyo’s main business district, 6.39% of total office space was available for lease in June, up slightly from 6.37% a month earlier, according to real estate brokerage Miki Shoji. Tokyo’s office vacancy rate has thus stayed roughly flat in a range between 6.2% and 6.5% for a year now after having previously quickly deteriorated from a cycle low of 1.5% in March 2020 to reach its current range by mid-2021. Assuming the rate does not start to move higher again, the vacancy rate appears to be slightly more benign than what we had projected in May 2021, when we had forecast it might to peak around 8% or 9% by early 2023. Still, notwithstanding the slightly better-than-projected trend in the headline vacancy rate, we see the outlook for the Tokyo office leasing market as being in line with the base-case scenario we adopted at the beginning of the pandemic in March 2020 (see our March 25, 2020 note for details) for a downturn roughly half as deep as the one experienced after 2008.