Japan Real Estate Boom Tests J-REITs as BOJ Lifts Rates to 1.25%

A market the rest of the world can only envy

For most of the past five years, commercial real estate stories from New York, London and San Francisco have been about empty towers, distressed loans and falling valuations. Japan is the exception, and in 2026 the gap has become hard to ignore. Investment in Japanese commercial property hit ¥6.5 trillion in 2025, according to CBRE. That was 31% more than the year before and about 20% above the old record from 2007. The first quarter of 2026 then set a new Q1 record of just over ¥2 trillion.15 CBRE expects full-year 2026 volumes to land close to 2025's record. It points to lenders who remain willing to lend and rents that keep climbing.14

The headline numbers hide a more interesting story, though. Japan's real estate boom now rests on three things that are starting to pull against each other: office fundamentals that are about as tight as they can get, bank lending to property at levels well past the 1989 bubble, and a central bank raising rates faster than at any time in a generation. Listed J-REITs show the strain most clearly, because their unit prices have fallen even as the buildings they own have risen in value.

The office market: tight, then tighter

Across the major brokerages, the Tokyo office numbers point the same way, even if the exact figures differ. Colliers puts Grade A vacancy in the five central wards at 1.3% in the second quarter of 2026, with average rents up 3.9% on the quarter to ¥39,900 per tsubo.21 CBRE measured all-grade vacancy at 1.5% in the first quarter. New supply that quarter was more than twice the historical average, yet tenants absorbed even more space than was delivered. Grade A rents rose 5.4% in a single quarter, just behind the all-time record set in 2006.24 Savills, which uses a narrower definition, reported Grade A vacancy of only 0.5%, with rents up 18.2% year on year. It said rents had passed their 2020 peak for the first time.23 Nikkei Asia called Tokyo's vacancy rate the lowest of any major global city and credited a return to in-person work.28

The sources differ more on the details than on the overall picture. Colliers says rent growth slowed in the second quarter because the usual new-fiscal-year rent revisions had been completed. It also flags "secondary vacancy", meaning space freed up when tenants move into new buildings, as the main force that could eventually loosen the market.21 Analysts using Miki Shoji data describe "super-polarization": prime space is effectively full, while older Grade B stock in areas like Minato struggles to find tenants even after rent cuts.22 Savills likewise expects newer, top-tier buildings to see the strongest rent growth and older ones to lag unless landlords renovate. It also notes that inflation-linked leases may start appearing in Tokyo this year, which would be a real change in a market where rents stayed flat for decades.27

One data point stands out against the bullish leasing picture. A price index cited by Glocaly showed office assets in the three major metropolitan areas falling 9.5%, while logistics warehouses rose 11.6%. That suggests investors are already choosing carefully between property types.17 Our reading is that Japan's office strength is real but narrow. It rewards modern, well-located buildings, and is less a rising tide for every office building in the country.

The lending boom regulators are watching

The second part of the story is credit, and here the comparison with the bubble era is hard to miss. According to the Bank of Japan, new bank lending to real estate reached ¥17.8 trillion in 2025, up 15.1%. That is roughly 70% above the 1989 peak of ¥10.4 trillion.41 Real estate took 30.9% of all new loans, compared with 18% at the height of the bubble. 2025 was the fifth straight year of growth.42 Total property loans outstanding at Japanese financial institutions reached ¥147 trillion by the end of March 2026. Loans to special purpose companies for securitization deals rose 18% to ¥19 trillion.43

Lenders are not pulling back. CBRE's 2026 lender survey found no real change in their willingness to lend. Forty-three percent of respondents expect property prices to rise over the next year, the highest share since the survey began in 2018.43 One major banking group told the Japan Times that income from high-quality property feels steadier than lending to cyclical industries.42

The central bank is more cautious. Its April Financial System Report said property-related lending is growing faster than lending overall. It also said the mix is shifting toward real estate businesses and funds, and that banks are lending more to foreign investment funds, which carry their own kinds of risk.46 The report found no significant change yet in defaults or in banks' ability to handle higher rates.47 The BOJ and the Financial Services Agency are, however, increasing oversight. Inspectors are examining underwriting standards after cases of borrowers quickly reselling properties bought with bank loans.42

The risk looks concentrated among regional banks. With weak loan demand at home, these lenders are chasing deals in Tokyo.42 An FSA review, as summarized by one market analysis, found that a quarter of regional banks' property lending is concentrated in Tokyo's five central wards. It also found that 60% of property lending in those wards comes from banks based outside the capital.45 The same analysis argues that these lenders face pressure from two sides: higher carrying costs for their borrowers, and paper losses on their bond holdings as yields rise. The megabanks, which hold short-duration bonds, are largely protected.45 This is analysis rather than an official verdict. Still, it fits the BOJ's own warning that the ways stress spreads through the system may differ from past episodes.46

Rates are rising faster than expected

The Bank of Japan's normalization of monetary policy is behind all of this. It raised its policy rate to 1% in June, the highest since 1995, with a 7-1 vote, citing inflation risks from the energy shock caused by the Iran war.23 In September it raised the rate again to 1.25%, only three months after the previous hike, with two board members voting against.6 Ten-year government bond yields were near 2.95% after that decision.6 The next policy meeting is on October 30.1

What this means for property returns depends on whom you ask. Colliers researcher Kohei Kawai has said rate increases have narrowed Japan's key advantage, the wide gap between property yields and borrowing costs.20 Others argue that Japan is still one of the few major markets where borrowing costs sit below property yields, so leveraged buyers still earn more than they pay. Rising rents and a weak yen add to the appeal.15 Both views hold. The spread still exists, but it is shrinking, and each hike leaves less room for error.

The J-REIT paradox

Listed REITs are where the pressure shows first. After gaining 21.8% in 2025, the TSE REIT Index was around 1,860 in late July 2026. That was about 8% below its late-February high, as rising rates erased earlier gains.37 The average J-REIT dividend yield is around 5%. That leaves a spread of about two percentage points over long-term government bonds, which NLI Research Institute describes as narrow by historical standards.37 Weekly data show the market-wide yield at 5.15% in early September, with total market capitalization of about ¥15.45 trillion.32

The striking part is the valuation gap. NLI estimated that the sector traded at 0.86 times net asset value at the end of March. In other words, investors are pricing in a roughly 9% fall in property values, even though appraisals are still rising.37 That gap is now drawing outside buyers. Tosei and Singapore's GIC completed a friendly tender offer for Sankei Real Estate Investment Corporation in May, the first friendly takeover bid in the J-REIT market's history.37 Performance also varies by sector: logistics and infrastructure REITs have gained, while major office names have lagged.37 CBRE had expected higher financing costs to weigh on J-REITs. It also thought rising unit prices would let them fund acquisitions by issuing new units, but that has become harder as unit prices fell.14 Separately, the BOJ began selling its own J-REIT holdings in late 2025, though slowly enough that the program will take decades to finish.7

What to watch

Taken together, the reporting points to a Japanese property market that is fundamentally strong but more sensitive to interest rates than its admirers sometimes admit. Foreign capital keeps arriving. Tokyo has ranked as Asia-Pacific's top destination for cross-border investment for seven straight years.15 Japan has started requiring buyers to disclose their nationality and has tightened reporting rules, but it has stopped short of restricting ownership.12

The J-REIT discount is best read as an early warning. Public markets are pricing in a repricing of property values that private appraisals have not yet shown. If the BOJ keeps raising rates every quarter, the weakest points will be regional banks heavily lent into central Tokyo and older office buildings losing tenants to new towers, not the prime towers themselves. If rate increases level off, the discount to NAV looks like an opportunity, and more buyers like GIC are likely to act on it.