Nicholas Spiro

The View | Japan office market shines as beacon of hope despite BOJ policy scare

Japanese monetary policy, once reassuringly predictable, is now a source of uncertainty for global investors, yet Tokyo is a bastion of stability compared to many of the world’s leading office markets

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Office buildings are illuminated at night in Tokyo on July 21. The average vacancy rate for grade A offices in Tokyo was the second-lowest in the Asia-Pacific region. Photo: Bloomberg

Nicholas Spiro

Published: 3:45pm, 31 Jul 2023

In sovereign debt markets, Japan is the wild card. On July 28, the Bank of Japan (BOJ) spooked investors by unexpectedly loosening its grip on the country’s tightly controlled government bond market.

While its decision to raise its cap on the country’s 10-year bond yield from 0.5 per cent to 1 per cent was a minor tweak, it revived speculation about a more drastic unwinding of the BOJ’s decades-long ultra-loose monetary policy, a shift that could have far-reaching consequences for global markets.

Yet, when it comes to commercial real estate – in particular the office sector – Japan is a rare source of stability and resilience. This is remarkable given the severity of the deterioration in sentiment towards office properties since the Covid-19 pandemic erupted.

Three successive shocks – the pandemic-induced shift in working practices that has crimped demand for office space, the dramatic rise in interest rates and the recent turmoil in the US banking sector that has fuelled concerns about a credit crunch – have fanned fears of an “office apocalypse”.

A hard-hitting report published by McKinsey on July 13 captures the scale of the problem. It predicts that demand for office space in nine “superstar” cities – which include New York, San Francisco, London, Paris and Tokyo – will be as much as 20 per cent lower in 2030 compared with 2019, and by as much as 38 per cent lower in a worst-case scenario. Depending on the severity of the downturn, the value of office properties in the cities surveyed will drop by 26 to 42 per cent by 2030.

McKinsey also draws attention to what is seen as the biggest source of vulnerability in the office sector: older, unrenovated buildings often in peripheral locations. In New York, the value of grade A buildings – newer, high-quality, sustainable properties suited to hybrid work – rose 3 per cent between 2020 and 2022 compared with an 8 per cent decline for grade B offices.