Gross leasing volume (GLV), which measures the cumulative transaction volume in a given time period, identified from existing, new and future supply, is one of the key real estate indicators JLL Research monitors to understand market conditions. In Tokyo, the GLV of Grade A offices marked record levels in 2018 but has slowed down entering 2019, with technology firms a key driver.

The Japanese economy has been enjoying a slower but longer growth cycle with real GDP growing for seven consecutive years to 2018 and positive forecasts for the mid- to long-term, as well as sustained corporate sentiment for more than six years through 3Q19 (BOJ Tankan Survey).

In line with that, the real estate leasing market has strengthened, with demand rapidly absorbing supply. Overall vacancy rate has decreased to 0.6% at end-3Q19, down by 720 bps versus the previous high at the end of 2Q10. This reflects a sub-4% vacancy rate for more than 8 years since 3Q11. Meanwhile, rents saw growth of 30% from the previous trough in 1Q12, and capital values appreciated 103% with cap rates compressing to record lows.

The spillover demand from the tightening leasing market was pronged to ample future supply which is scheduled to increase office stock by 21% in the three years from 2018-2020. GLV increased 17% y-o-y in 2018, renewing the record level for the second consecutive year in contrast with slow net absorption. At end 3Q19, the forward commitment rate of new supply in 2019 was close to 100%, with very high rates expected to continue into 2020 and 2021.

From 2017-3Q19, forward commitment accounted for 60% of total GLV.  Demand was driven by tech companies (40%), followed by manufacturing excluding tech related (14%) and, wholesale and retail trade and finance and insurance (both 11%). The presence of tech companies was remarkable in submarkets including Shibuya, where Google has committed to the entire Shibuya Stream, and Mixi and Cyber Agent the Shibuya Scramble Square due in November 2019. As such, annual rent growth in the submarket accelerated to above 10% in recent quarters, with premium rents now comparable to the one charged in Otemachi and Marunouchi.

Figure 1: GLV by Industrial Sector
Source: JLL Research

Looking ahead, underlying economic growth is expected to remain solid despite downside risks to the outlook including the overseas tension over trade issues. GLV is expected to be constrained to some extent in the foreseeable future, given the low vacancy rate of existing buildings and high forward commitment rate of future supply, coupled with strong expansion demand often absorbing vacant area before being offered to the market. However, this will likely mitigate the potential for downward pressure on rents given the major new supply arriving through 2020. In the investment market, the current capital value appreciation is due largely to the tight demand-supply balance placing downward pressure on cap rates rather than strong rent growth expectations, hence the impact is expected to be relatively limited.

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