Tokyo Office Rents Surge as Investment Flows Back In

Big money is returning to Tokyo offices

Even with borrowing costs at a 31-year peak, Japan logged ¥2 trillion of commercial-property investment in the third quarter, the strongest third-quarter tally since 2007, JLL says. Most of that capital aimed at Tokyo, and offices were the biggest slice of deals at 36%.

CBRE notes the quarter's largest office trade was Pacific Century Place Marunouchi at ¥230 billion. Blackstone also plans to sell the office component of Tokyo Garden Terrace Kioicho for around ¥300 billion, roughly two years after it agreed on a purchase of the mixed-use complex pegged at about ¥400 billion. A person familiar with the matter said that, since only the office portion is being sold, achieving the asking price would translate into a sizable profit. A Blackstone representative declined to comment.

Why rents keep climbing even as rates rise

The Bank of Japan's benchmark rate sits at 1.25%, the highest since 1995. Yet the rent story is overpowering the rate story. "Rent is increasing so investors are still able to see huge amounts of rental upside, especially if the current building's office rent is lower than the market rate today," said JLL Japan's research director of capital markets, Koji Naito.

CBRE's Chinatsu Hani put it bluntly: "We've seen traditional Japanese corporates who never really used to spend on office now spending." Companies with solid results are shifting into higher-quality space, with names like Itochu, Mizuno and Nippon Sanso announcing moves to trophy offices over the last two years.

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Rents, supply and what it means for your portfolio

CBRE reports Tokyo's vacancy rate was 1.3% in the third quarter - one of the lowest in the world - and that top-tier buildings kept vacancies under 1% for the fourth straight quarter. JLL expects rents for the very best buildings in Tokyo to set a new high by 2030, even as fresh supply arrives. Residential rents in the city are also climbing.

Demand is not just a Tokyo story. Trophy assets in Osaka and Nagoya saw rents push higher against a tighter supply backdrop in the third quarter, and CBRE says top-end office rents in Osaka hit a record. The bottom line: rent growth, low vacancies and Tokyo-heavy deal flow are keeping transactions moving despite higher BOJ rates, shaping where property capital goes and which tenants trade up.

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