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Central Tokyo office rents up 13.36% over a year ago

Late last week, real estate consulting firm Miki Shoji released their quarterly Tokyo Office Building Market Research Report for January 2008. The report covers the five central wards of Tokyo (Shinjuku, Shibuya, Minato, Chiyoda and Chuo Wards). It surveys 2,619 office buildings (35 new and 2,584 pre-existing) that have at least 330 square meters of office space for rent on each floor. New buildings are defined as having their office space come online after January 1, 2007.

The first thing we notice is that the number of “new” buildings has increased by ten since the last report was issued in October. With rent at new buildings being exceedingly higher than that of older buildings, the addition of ten new buildings pulls the increase in average rent noticeably above the increase in rent at existing buildings.

In October, it was reported that average rent in the five main wards of Tokyo had increased 11.97% over the previous year. January’s figures exceeded that, posting a 13.36% increase in price since January 2007. For January, the average office rent was reported at 21,998 yen per tsubo (about 3.3 square meters).

For new buildings, average rent per tsubo stood at 35,906 yen, a 25.64% increase over a year ago. At previously existing buildings, rent was at 21,683 yen, for an increase of 12.29 percent.

At the end of December, vacancy rates at new buildings were at 4.08 percent, down 3.64 percent from the year before. It is worth noting, however, that while vacancy rates in December 2007 stood at 7.72 percent, they were down to just over 4 percent a month later. Thus, since October 2007, we have have seen two straight months with an increase in vacancy rates at newly built buildings.

At existing buildings, vacancy rates were at 2.60% at the end of December, down slightly from a year ago though up slightly from the previous month.

One interesting tidbit in the report is that in 2008, the amount of newly completed office space in Tokyo is not expected to come close to the amount that came online in 2007. In 2007, about 1.56 million square meters of new office space came online in Tokyo. In 2008, that figure is projected to decline to about 724,000 square meters. If Miki Shoji’s projections are accurate, that would be the lowest amount of new office space to become available in Tokyo this decade.

Although this could create supply-side problems and thus result in higher rents for newly built buildings, construction is also bound to pick up again at some point after the second quarter of 2008. At any rate, we’re starting to wonder if this market is coming close to peak, given upcoming economic turbulence and the slight uptick in vacancy rates. We’ve not yet seen the hugely obvious signs of a peak, but we’ll have to be watching out for them over the next six months.

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