Going vacant: Japan’s empty offices drag real estate shares down

Office vacancies in Tokyo’s main business areas have risen for four consecutive months due to coronavirus lockdowns.

Japan office
Japan's seven-year office boom has been shattered by the COVID-19 pandemic and analysts say the trend is expected to continue until the end of this year [File: Issei Kato/Reuters]

Rising vacancies for offices in central Tokyo are weighing on shares of Japan’s real estate developers and owners as the market digests the damage that the pandemic has done to a seven-year office boom.

Office vacancies in five of Tokyo’s major business districts rose for a fourth consecutive month, gaining to 1.97% from 1.64% in May, real estate brokerage Miki Shoji Co. said on Thursday. The increase is the largest one-month gain in more than a decade.

Shares in Tokyu Fudosan Holdings Corp. fell as much as 4.6% on Friday, while Ichigo Inc. fell as much as 6%. The Topix Real Estate index fell as much as 2.9%, the third-worst performer among the index’s 33 sub-groups.

Vacancies in Tokyo fell almost unrelentingly for the seven years since before Prime Minister Shinzo Abe came to power in late 2012, even as rents continued to rise. The vacancies trend was halted by the pandemic, which has made prospective tenants reluctant to sign leases and raised questions worldwide about the future of the office.

Fujitsu Ltd., one of the country’s largest employers, has already declared its intent to cut its office space in Japan by 50% over the next three years and have 80,000 workers work mostly from their homes.

One of Japan’s Largest Employers Plans to Halve Office Space

Tokyu Fudosan’s share drop on Friday was larger than some peers, with the increase in vacancies especially prominent in the Shibuya area, where the rate increased to 3.38% from 2.55%. The area houses some 34% of Tokyu’s office portfolio, according to Jefferies.

“Shibuya is known for a higher concentration of both tech-related and mid-sized tenants,” Jefferies analysts William Montgomery and Shunsuke Kuriyama wrote. “With the increase in teleworking, the market is concerned that small and mid-sized companies and tech-focused companies are reducing demand.” However, they noted that while its older portfolio of Shibuya properties will be under pressure, much of its portfolio is new, which will add “earnings resilience.”

SMBC Nikko Securities Inc. analyst Junichi Tazawa wrote in a note on Thursday that he expects vacancies to increase to 3.9% by the end of the year, before recovering to 3.4% by the end of 2021 and 3.1% by the close of the following year.

Source: Bloomberg