Welcome to the fifth edition of the Savills Japan Monthly-ish Opinion Letter.

As we move into autumn, Tokyo’s office market presents an intriguing contrast. Core districts such as Chiyoda, Shinjuku, and Shibuya are enjoying historically tight occupancy at 20-30 bps, with Grade A vacancy in the central five wards (C5W) approaching record lows at 50 bps as of Q3. This renewed strength is prompting tenants and investors alike to consider submarkets previously seen as secondary. Among them, the bayfront areas of Harumi (Chuo), Konan/Kaigan (Minato), and Tennozu (Shinagawa) are attracting fresh scrutiny.

The bayfront has long carried mixed perceptions, valued for modern stock and scale, yet challenged by distance from transport hubs and questions of prestige. With new large supply largely absorbed, improvements in infrastructure, and landlords adopting more flexible leasing strategies, the outlook for these submarkets is shifting. This month, we examine whether Tokyo’s Grade A bayfront offices are entering a new phase of cautious opportunity.

Market Overview: Vacancy Peaks Behind Us

During the pandemic when office locations mattered more than before, bayfront vacancy surged well above central benchmarks. Harumi’s Grade A vacancy skyrocketed nearly 30% in mid-2023, and Tennozu touched the 15% mark. However, recent quarters show steady absorption as vacancies are now trending downward across all three districts. Most notably, Harumi’s vacancy has recovered to below the 5% level, driven by a major tenant lease. Meanwhile, Tennozu’s vacancy remains just under 10% and is expected to improve further, given the limited availability of Grade A options. Reflecting the broader positive trend in the bayfront areas, the Konan/Kaigan area has already approached pre-pandemic levels of tightness.

By contrast, the C5W has tightened dramatically, with Grade A vacancy falling to the 0-1.5% range. Core districts such as Chiyoda, Shinjuku, and Shibuya have almost no vacancy, or are below 0.3%.  While the gap between core and bayfront remains wide, the inflection is clear: softness triggered by the pandemic is giving way to gradual and steady rebalancing.

Tenant Trends: Size, Cost, and Flexibility

Bayfront demand continues to be shaped by three factors:

• Large, contiguous floorplates: With many buildings offering 1,000-2,000 sq m per floor, the bayfront remains one of the few available options for occupiers needing scale at reasonable rents.
• Relative affordability: Rent differentials versus the C5W can reach 40-50%, appealing to firms balancing expansion with cost discipline.
• Fit-out and flexibility: Recognising tenant sensitivity to capital expenditure, landlords are increasingly offering fitted or semi-fitted offices, flexible layouts, and short lease terms. This approach has proven effective in capturing demand from a number of industries and functions.

Lifestyle and amenity improvements continue to strengthen appeal. Harumi benefits from new community infrastructure, Konan/Kaigan from proximity to residential and retail developments, and Tennozu from waterfront placemaking and enhanced connectivity to Shinagawa.

Investor Perspective: Bifurcation Deepens

For investors, the bayfront presents a nuanced landscape. Prime Tokyo offices command cap rates at sub 3%, while bayfront yields are slightly higher, reflecting structural vacancy risk. Indeed, data indicates that most of Tokyo’s long-vacant large-scale buildings are concentrated in bayfront districts.

This underscores a bifurcated market: well-specified, accessible assets with modern specifications are leasing steadily, while older or less connected buildings somewhat struggle. Opportunistic investors may find value in repositioning such properties through mixed-use integration or alternative uses such as life science research laboratories, flexible workspace, or fitted workspace.

Concurrently, relative pricing is increasingly compelling. Investors willing to underwrite leasing risk can secure yields that offer a notable spread over C5W benchmarks, with upside potential as absorption continues.

Challenges and Constraints

Despite encouraging signs, challenges remain. Public transport access continues to be a limiting factor. Harumi in particular lacks direct subway links. While bus and BRT networks are improving, they are not yet substitutes for rail connectivity.

Corporate image also plays a role. For sectors such as finance and professional services, central locations remain non-negotiable. As such, bayfront demand is likely to remain concentrated in cost-sensitive and operationally flexible industries rather than prestige-driven tenants.

Moreover, the market may remain exposed to macro headwinds. Any slowdown in core district demand could quickly spill over into weaker bayfront absorption, where incentives are still generous and competition for tenants remains fierce.

Outlook

Looking forward, we expect bayfront vacancy to continue decreasing steadily over the next 12 months, though it will remain higher than C5W levels. Rent growth is likely to be more modest, with landlords prioritising occupancy through incentives and fitted offerings.

For tenants, bayfront offices offer a rare combination of scale, modern specifications, and relative affordability in today’s tightening market. For investors, selective plays in high-quality assets or creative repositioning strategies may deliver attractive returns, though careful underwriting remains essential.

Tokyo’s bayfront has moved beyond the large supply narrative of recent years. While it will not rival the prestige or tightness of the C5W, these districts now represent a meaningful complement, offering flexibility, optionality, and opportunity in a market otherwise defined by scarcity. These three submarkets attract similar tenants, and the performance depends on property level rather than submarkets. Delicate power balances exist between the three, and careful, close analysis is key to successful investment.

*If you would like to stay updated on the progress of Tokyo’s Grade A office market, please refer to our Tokyo Office Q3 Briefing, which will be released shortly.