Tokyo’s Property Pulse: Market Trends and Global Influences

“Japan is coming back to the world stage,” said Takeshi Akagi, executive director and head of research at JLL Japan, referring to the country’s global standing and property market development.

Akagi pointed to the Nikkei average on March 22, 2024 of ¥40,888, which exceeds the previous peak, ¥38,915, reached in 1989 during Japan’s asset price bubble period (1986–1991) when real estate and stock market prices were greatly inflated.

The collapse of the bubble economy saw Japan enter the “lost decades,” when the country “began to stagnate in the world economy,” he said. Now, however, Japan is “coming back,” he added, pointing to the global rise of Japanese goods and services, including robotics, tourism, foods and anime.

In real estate, too, Japan is “at the beginning of a new era,” he said, noting that the Japanese office market is “doing well.”

Akagi was one of several speakers at a British Chamber of Commerce in Japan event supported by the Royal Institution of Chartered Surveyors and hosted at the JLL Tokyo offices in July. The experts discussed how market forces, global events and emerging trends are shaping the real estate landscape in Tokyo and other cities across the country.

Looking first at the occupier market, Akagi said office rents are bottoming out, as evidenced by a Tokyo Grade A office vacancy rate of 4.2% alongside rent market growth of 0.9% quarter on quarter, as of March 2024.

“The vacancy rate will come down further and rent will increase slowly this year,” he added, noting Tokyo’s increasingly favourable position compared to other major global cities.

San Francisco has the highest global office vacancy rate, at 32.1%, followed by Dallas (26.2%) and Washington D.C. (21.7%), according to JLL Research. European and Asian cities are faring better, with London at 8.9%, Paris at 7.4% and Singapore at 5.3%, he explained, attributing Tokyo’s performance to its post-pandemic return to office rate of 80%, compared to San Francisco’s rate of 46%.

In the investment market, too, Japan has surged while global markets have contracted, he said. Global investment volume saw a “significant dip” of 44% in 2023, followed by a further 6% decline in Q1 2024. On the other hand, Japan investment volume increased 6% year-on-year in 2023 and by 45% in Q1 2024, “supported by economic recovery post-pandemic and the low interest rate.”

This places Japan’s investment market second globally, after the US, up from seventh in 2023. For Q1 2024 volume, Tokyo was ranked as the top city globally (up from fifth in 2023), followed by New York and London.

Summing up, Akagi said “Japan is rising” but noted two concerns.

First, following the Bank of Japan’s move to end its negative interest rate in March 2024, the resultant higher interest rate could have a negative impact on the economy, especially in the investment market. However, Japan’s current low policy rate and government bond yield compared to other countries, such as the US and UK, could mitigate challenges.

The second concern is construction cost. The soaring cost of imported materials, energy, transportation and labour caused by supply chain disruption, geopolitical issues, the depreciation of the yen and an ageing population has resulted in a 25% increase in cost since 2021.

 

When, where and what to invest in  

A panel comprising Hideki Yano, director of strategy and project development at Es-Con Japan Ltd.; Neil Hitchen, chief operating officer and head of Japan corporate development at JLL Japan; Vivian Wong, head of acquisition at DASH Living; and Masato Yokozawa, senior director of project management, public and government infrastructure and green energy for Japan at Turner & Townsend KK; considered opportunities for investors, with moderation provided by Shigeko Mizutani, managing director of valuation and consulting services for Japan at CBRE.

Tokyo’s office market is seeing increased interest from domestic and international investors, Hitchen shared, noting that companies’ strong return to the office makes the environment “favourable.”

 

 

Although Tokyo-based tenants contracted or handed back their rental space in 2020 and 2021, there was later a quick switch to tenant expansion, which reached 35% in 2022. In 2023, of the companies that relocated in Tokyo, only 7% attributed the move to reducing space, compared to those who wanted to expand (27%), increase headcount (18%) and improve location (12%).

Yano said investors can benefit from Japan’s social and political stability, as well as the availability of transparent, robust data for decision-making. In addition, there is no additional burden on foreign investors.

Wong agreed, noting that the office bond yield gap and low interest rate makes Japan investment deals more attractive than those in Singapore and Hong Kong at the moment.

The panellists noted that given rising construction costs, it is better to invest sooner rather than later.

Yokozawa pointed to a May 2024 report from Turner and Townsend showing the construction cost of a steel reinforced concrete structure has risen from 113.10 in March 2022 to 132.40 in July 2024, with a rise to 138.70 expected by March 2025. The trend is accelerating due to the number of large-scale projects planned across the country including semiconductor plants in Hokkaido and Kumamoto, valued at a total of ¥8.1 billion, as well as Expo 2025 in Osaka, offshore wind power development and investment in defence capabilities.

With strong demand, most general contractors have a passive attitude towards bidding, according to the same report. Asked their likelihood of tendering a new project within 2024, 88% said they were “unlikely” to tender, with market pressure only starting to ease in 2027, explained Yokozawa.

 

 

The construction industry’s challenges include ageing workers, few technological adaptions, a lack of subcontractors and pressure to raise costs, he added.

Regarding where to invest, Hitchen noted that 90% of current investment is in Tokyo or Osaka. Most is going into the office sector, particularly Grade B offices, although retail is picking up and logistics remains a major asset class. However, hospitality-related investments in Japan’s regions are also on the rise.

Yano agreed that tourism-related investment, including in Japan’s countryside, is something to consider, given that travel and tourism will be Japan’s “next growth engine.”

The residential sector is also gaining popularity due to its stability and favourable supply-demand dynamics, shared Wong. “Lots of buildings have been converted to offices or hotels in recent years, leading residential land to become limited—and residential yields are attractive still,” she said.

The hotel, residential and logistics sectors are gaining a lot of interest as they are all inflation-prone, she added. Amongst those asset classes, residential property remains easier to acquire than hotel assets because developers and investors are regularly putting residential assets on the market for sale.

Yokozawa explained that construction costs will continue to be determined heavily by supply and demand. He recommended investors avoid areas of Japan where large-scale projects are being carried out, such as Hokkaido and Kumamoto, to avoid inflated costs.