Tokyo’s prime retail market is on a roll, rebounding from the pandemic’s disruption and attracting shoppers and investors alike. The market is experiencing a resurgence driven by a combination of strong demand and limited supply, particularly for high-quality spaces coveted by luxury brands.
Demand Fuels Growth
The demand for prime retail space is booming, with luxury brands leading the charge. The limited supply of properties that meet their stringent requirements has created intense competition for available spaces, particularly when tenants move out. This competitive landscape is driving up rental prices.
Rental Rates Surge
Ground floor rents are leading the charge, pushing overall rental growth upwards. In Ginza, rent per square meter is nearing pre-pandemic levels, approaching ¥275,000 per month (preliminary data for the second quarter of 2023, JLL). Omotesando has already surpassed 2019 levels, reaching a record high of ¥245,000 per square meter per month during the same period (Figure 1).
Capital Values Climb Back Up
Capital values in Tokyo’s prime retail market took a hit during the pandemic, dropping by 19% compared to the fourth quarter of 2019 (JLL data). This decline was primarily attributed to changes in rents and capitalization rates. However, capital values bottomed out in the second quarter of 2021 and have been steadily climbing ever since. The momentum accelerated in the second quarter of 2022, mirroring the strong rental growth.
A Resurgent Retail Landscape
The recovery of Tokyo’s prime retail market is fueled by a resurgence in consumer spending. Pent-up demand from domestic consumers, in particular, is being released, driving growth in the retail sector. Luxury goods have seen remarkable growth in the first five months of 2023, with sales increasing by 40% compared to the same period in 2019 before the pandemic (Japan Department Stores Association). This growing consumer confidence is reflected in the increasing number of inquiries from businesses seeking new retail locations.
A Bright Future: Sustained Growth on the Horizon
The future looks bright for Tokyo’s prime retail market, with accelerating capital value growth expected. This growth is likely to be propelled by the continued increase in rental rates. This positive outlook is evident in the current position of the retail property cycle (Figure 2).
Upper Floors Gain Momentum
The return of foot traffic is adding momentum to the upper floors, as restaurants and other businesses seek to capitalize on the growing consumer traffic. Domestic railway passenger numbers in Greater Tokyo have recovered to 83% of pre-pandemic levels in February 2023 (MLIT), while foreign visitor arrivals in May 2023 reached 67% of pre-pandemic levels (JNTO).
Cap Rate Compression Drives Growth
Cap rates are expected to compress or remain stable. The slowdown in retail investment activity during the pandemic, driven by investors’ cautious approach and owners’ confidence in the long-term value, is now reversing. Notable transactions, including those involving small-lot Specified Joint Real Estate Ventures (FTK), are increasing. The appeal of FTKs to high-net-worth individuals (HNWIs) and their asset management companies, coupled with the prime locations in Ginza and Omotesando, ensures quick sales.
HNWIs Influence the Market
HNWIs and their asset management companies prioritize long-term asset value over income, driving down cap rates. Their increased presence in the market is influencing the pricing strategies of traditional players such as institutional investors, real estate funds, and J-REITs, further pushing down cap rates.
A Vibrant and Attractive Market
Tokyo’s prime retail market is a dynamic and attractive space for both businesses and investors. It offers a thriving environment for retail and F&B businesses while appealing to investors seeking sustainable income and value growth. This robust market continues to be a beacon of growth and prosperity, attracting both shoppers and investors seeking a piece of the action.
