Morgan Stanley and JLL Data Shows Widening Divergence in Global Office Stock

Data from Morgan Stanley and JLL shows a sharp K-shaped recovery across key international gateway cities, driven by widening capital value gaps between prime and secondary office space. According to the joint data, prime office vacancy fell below 2% in Tokyo and stood near 5% in prime Manhattan submarkets during recent tracking periods. Conversely, secondary submarkets face elevated vacancies, reaching 20% in Kowloon East and 18.4% in Financial District Manhattan, holding back global property capital values despite leasing gains in top-tier stock.

To evaluate these statistics accurately, investors must scrutinize the underlying methodologies. The reported figures reflect completed lease transactions and physical occupancy in prime stock, rather than nominal asking rents across all asset tiers. In fast-moving urban centres, aggregated index averages mask localized distress because prime composition bias distorts the broad headline picture.

Scale of Market Polarization

According to CBRE, Tokyo's Grade A office vacancy rate fell to 0.7% in Q4 2025. Over the same three-month period, average Grade A rents reached JPY 41,050 per tsubo per month, according to CBRE figures. This represents a clear gain when evaluated against historical cycle benchmarks in the Japanese capital.

In Q1 2020, Tokyo Grade A office rents reached a previous peak of JPY 39,000 per tsubo per month prior to pandemic-era vacancy increases, as recorded by CBRE. Comparing the Q4 2025 figure of JPY 41,050 per tsubo per month against the Q1 2020 figure of JPY 39,000 per tsubo per month shows that nominal prime rents have surpassed their pre-pandemic high mark by JPY 2,050 per tsubo per month.

This nominal rent growth in Tokyo contrasts sharply with the performance of secondary locations globally. While prime Manhattan submarkets held vacancy near 5%, secondary space in Financial District Manhattan experienced vacancy rates of 18.4%, according to Morgan Stanley and JLL. Similarly, Kowloon East recorded a vacancy rate of 20%, illustrating that leasing demand remains concentrated in centralized prime nodes.

Financial and Monetary Drivers

The divergence in asset performance coincides with shifts in central bank policy and debt availability. In March 2024, the Bank of Japan ended its negative interest rate policy by raising the benchmark rate from -0.1% to 0.1%, as documented by DWS. This policy adjustment shifted baseline financing conditions across the Japanese commercial property market.

Despite the rate increase, financial institutions maintained accommodative lending standards for prime assets, according to DWS research. Lenders have prioritized prime locations with secured cash flows, creating distinct borrowing conditions for prime stock compared to secondary properties.

Investment manager DWS and consultancy CBRE track institutional investment in Tokyo prime submarkets such as Otemachi. In Otemachi, prime office expected net operating income (NOI) yields stood at 3.10% in Q2 2026, according to CBRE data. This low yield level reflects continued institutional willingness to accept tight spreads for core, highly occupied prime stock.

Institutional Capital Allocation

The operational split between Grade A and secondary space creates direct consequences for balance sheet valuations and debt refinancing programmes. Institutional funds face widening write-downs and debt refinancing challenges on Class B urban office assets, based on our reading of market clearing prices and regional vacancy figures.

These refinancing pressures are driving institutional capital allocation almost exclusively toward supply-constrained trophy stock. Asset managers seeking to redeploy capital are avoiding secondary assets due to elevated vacancy rates, such as the 20% rate reported in Kowloon East and 18.4% in Financial District Manhattan.

On our reading, the likely effect is a further concentration of institutional liquidity in a narrow tier of assets in gateway cities. Secondary properties without capital improvement plans face refinancing shortfalls as lenders adjust loan-to-value allowances for lower-grade space.

Secondary Market Resiliency

For this reading of total market polarization to be incorrect, demand would need to extend beyond the top tier of Grade A assets into secondary properties. Data from Savills Japan indicates that secondary space in select markets retains tenant absorption capacity.

Savills Japan reported that vacancy in Tokyo's large-scale Grade B office market tightened by 1.5 percentage points year-on-year to 1.1% in Q4 2025. This metric demonstrates strong tenant demand for well-located secondary assets within central Tokyo, according to Savills Japan.

If tenant demand for well-located Grade B properties persists alongside Grade A absorption, overall market cash flows may prove more resilient than national index averages suggest. However, this absorption remains selective and dependent on central transit access.

Key Indicators to Monitor

Market participants evaluating asset values must monitor transaction volumes against historical benchmarks to verify liquidity. CBRE projected full-year 2025 real estate investment volume in Japan to exceed JPY 6 trillion.

This JPY 6 trillion projection establishes a full-year record benchmark against which full-year 2026 capital allocations will be measured, according to CBRE. Investors should track whether 2026 transaction volumes meet this threshold or concentrate further in prime submarket deals.

In addition, tracking the spread between expected NOI yields in submarkets like Otemachi, which stood at 3.10% in Q2 2026 according to CBRE, and secondary submarket yields will clarify whether debt markets continue to reward prime assets over secondary inventory.