Japan's office market defies global trends with 0.9% vacancy rates, rising rents, and positive carry conditions that attract record investment volumes.
Insight
Positive carry and rising rents drive Japan investment
Looking at the global direct real estate investment market across the first three quarters of 2025, the U.S. continued to attract the largest amount of capital, followed by the U.K., with Japan ranking third. Despite the yen's depreciation, Tokyo also attracted the highest investment volume in U.S. dollar terms among global cities, surpassing both New York and London.
However, continuing monetary policy tightening presents a headwind for Japanese investors. After years of negative interest rates, the Bank of Japan is currently moving towards the monetary normalisation (i.e., tightening) process. The rise in policy interest rates has driven a sell-off in Japanese government bonds this year, as 10-year JGB yield rose to an 18-year high of 1.97% in mid-December Nonetheless, Japan's funding costs remain relatively low, with the spread between long-term interest rates and expected real estate investment yields maintaining a positive margin. As such, Japan remains one of the few global markets where this "positive carry" situation persists.
Figure 1: Direct Real Estate Investment – YTD By City, 3Q25
Source: JLL
Under these conditions, capital inflows into the office sector have been particularly notable in Japan's real estate investment market. While office markets globally suffered from rising vacancy rates and declining rents due to the adoption of remote working during the pandemic, Japan saw a relatively fast pace of return to the office. This drove the recovery in office demand at a relatively early stage, once the COVID-related restrictions were lifted in May 2023.
Furthermore, a severe labour shortage is also contributing to the tightening of the office market. Population decline has made securing new talent and improving existing employee satisfaction the urgent priorities for companies across all industries and sizes. This has resulted in a rapidly growing interest in high-quality Grade A offices located in Central Tokyo, offering excellent transport access and equipped with the latest facilities and security systems.
Beyond these demand-side factors, delays in the number of major development projects have led to fewer new supplies than previously anticipated. Higher demand and lower supply have driven the vacancy rate in Tokyo Central 5-Wards down to 0.9% as of the end of September 2025. Gross rents reached 37,042 yen per tsubo per month, up 2.4% quarter-over-quarter and 7.5% year-over-year.
The market has almost fully absorbed the supply of large-scale buildings in 2025, which were above the historical average. Prospective tenants are now shifting towards properties slated for completion in 2026. While the volume of new supply in 2026 is similar to this year, the market is already seeing progress in pre-leasing, suggesting that the tight supply-demand situation is likely to continue.
Against the backdrop of breaking free from three decades of deflation, an inflationary mindset is finally starting to take hold among tenant companies. Rather than beginning rent negotiations with discussions of reductions, as had traditionally been the case, companies now focus on determining how much of an increase will be applied. As such, there is a possibility that rents will not only continue to increase, but do so at a faster pace, given that the vacancy rates are projected to remain low.
Figure 2: Direct real estate investment – Japan by sector
Source: JLL