Rental growth has noticeably slowed in the Grade A and B office markets. At the least, underlying fundamentals should ease some concerns amongst Grade A office landlords.

• In the central five wards (C5W), despite signs that the pandemic is starting to take its toll on the office market, vacancy rates continue to be airtight and rental growth has persisted, albeit marginally.
• Average Grade A office market rents in the C5W grew 0.2% quarter-on-quarter (QoQ) and 4.8% year-on-year (YoY) to JPY37,840 per tsubo1 per month.
• The average Grade A office vacancy rate in the C5W increased slightly to 0.4% in Q2/2020.
• Average rents for large-scale Grade B office space rose to JPY28,656 per tsubo per month, growing by 0.3% QoQ and 3.7% YoY.
• The average vacancy rate in the Grade B market loosened slightly by 0.4 percentage points (ppts) QoQ and 0.3ppts YoY to 0.7%. A larger-than-average increase in Shibuya appears to be the main culprit.
• The high level of office supply expected this year is unlikely to raise alarms considering most of it has been filled or preleased. With supply levels drastically reducing in 2021 and 2022, the market should have some time to recover.
• With the spectre of COVID-19 casting a shadow of uncertainty over the office market, office quality and location matters more than ever. The true test for the sector looks set to take place in the remaining quarters of this year and next, especially at the lower end of the quality spectrum.