Prime Tokyo office pays 10 basis points over the Japanese government bond

Oxford Economics puts prime Tokyo office cap rates at roughly 3.1 percent as the 10-year Japanese government bond yields about 3 percent, its highest level in three decades. That leaves a 10-to-15 basis point cushion—one of the thinnest in the modern history of the Tokyo office market, as Amelie Delaunay, the firm’s head of Asia Pacific real estate economics, describes it—after a run-up in rates the firm reads as firmer inflation expectations.

The entry number matters less than where Oxford sees the rate path going. It expects the Bank of Japan to lift its policy rate to 1.75 percent by April 2027, which puts a rising floor under the discount rate in every Tokyo model, and it forecasts steady yield expansion across Tokyo all property over the next five years. Positive occupier fundamentals should offset some of that, the firm says, but offset is the operative verb: the cap rate is now working against the rent roll.

That reframes what a Tokyo core office deal is for. Core mandates buy buildings for the spread over the sovereign; at 10 to 15 basis points there is no spread left to buy, and leverage at that entry price, with funding costs anchored near the government’s own cost of money, subtracts from the return. A buyer signing at 3.1 percent is paying for rent growth and for an exit that prices at the same cap or tighter. Oxford’s own five-year forecast says the exit cap goes the other way. Both halves of that trade now have to be underwritten, and they pull in opposite directions.

Entry pricing this tight survives only on an operating edge—the ability to move rents on space that is hard to replicate—or on a mandate that treats Tokyo as strategic presence rather than a source of carry. What normally resets pricing is absent: no distressed seller, no loan maturity forcing a bid, no clearing trade. As this publication has argued about office globally, a true clearing price gets set when a sponsor balance sheet puts the first bid in. Tokyo’s version of that moment is being postponed while the spread quietly goes to zero, and appraisals have not yet followed it down.

Watch the 10-year JGB. Hold it near 3 percent into 2027 while Oxford’s policy path plays out and the cushion stays where Delaunay puts it; the adjustment arrives through sellers repricing, not buyers bidding the spread back.