The COVID-19 pandemic has brought about major changes in Tokyo’s real estate market. The rise of remote work and other global economic factors have led to skyrocketing office vacancy rates in the city.
If you’re a foreigner living in Japan or considering making a move or buying a property here, it’s essential to understand these trends to navigate the Tokyo real estate market.
As of August 2023, the office vacancy rate in Tokyo’s five core districts—Chiyoda, Chuo, Minato, Shinjuku, and Shibuya—stands at an alarming 6.4%.
Notably, this has surpassed the “safe” benchmark of 5% for an astonishing 31 consecutive months.
But the trend is not limited to Tokyo; cities like Osaka and Nagoya are also seeing a steady rise in vacancies, with rates of 4.6% and 5.5%, respectively.
The Drivers Behind the Trend
Several factors contribute to the increased vacancy rates. The COVID-19 pandemic was a catalyst that accelerated the remote working trend.
As companies adopted more flexible working arrangements, the demand for traditional office spaces began to wane.
Additionally, with an increasing number of businesses downsizing or shuttering their operations due to economic challenges, the result is a surplus of available office space.
Strategies by Real Estate Giants
In light of these changes, large real estate firms are taking various approaches to attract tenants.
Mori Building, for instance, has successfully lured international and professional service firms into their new office complexes by offering amenities like international schools and preventive healthcare facilities.
Mitsubishi Estate and Mitsui Fudosan are redesigning floor plans to cater to smaller businesses, offering short-term leases, and equipping spaces with furniture and amenities to attract startups and new corporate divisions.
Impact on Smaller Buildings
While large buildings see consistent demand, smaller buildings are losing tenants.
In areas like Shinagawa and Konan, which are traditionally populated by smaller offices, average rents have fallen by about 10,000 yen per tsubo (approximately 3.3 square meters).
As large firms continue to produce more new buildings, these smaller spaces are increasingly overlooked, thus pushing landlords to reduce prices.
Opportunities for Startups and Expatriates
If there’s a silver lining to be found, the declining rents offer more accessible opportunities for startups and, potentially, for expatriates looking to set up businesses.
Previously expensive and inaccessible central Tokyo locations are becoming more feasible options for smaller enterprises, enabling a more diverse business ecosystem to thrive in the heart of the city.
The Future Outlook
According to the Tokyo Chamber of Commerce and Industry, the real estate sector has seen an increase in the number of bankruptcies for eight consecutive months until June 2023.
Some reputable consultants predict vacancy rates in central Tokyo’s five districts could deteriorate to 7.2% by 2027.
As vacancies and declining rents continue, smaller businesses are at risk of getting edged out, thereby resulting in a concentration of prime properties and tenants among larger corporations.
The face of Tokyo’s commercial real estate is undergoing a transformation. High vacancy rates and declining rents are shaping new opportunities but also present challenges that need to be navigated carefully.
Understanding these market dynamics is essential for making informed decisions, whether you’re an entrepreneur, a startup enthusiast, or simply someone looking to grasp the economic pulse of this vibrant city.