Morgan Stanley & Global Funds Bet $684 M on Japan’s Office‑Living Revival

Quick Takeaways

Fundraise: Morgan Stanley’s Japan-focused real estate fund has secured about ¥1000 billion (≈$684 million) in commitments ahead of a June 2025 close
Investor mix: US, European and Asian funds (e.g. Brookfield, Blackstone, Hillhouse, EQT, Warburg Pincus) are aggressively re-entering Japan, often co-investing in office-to-residential conversions.
Vacancy low: Tokyo’s vacancy is now very tight (≈2.3% in central 23 wards), with Osaka similarly around 4%. High occupancy and accelerating rents are drawing funding into “value-add” reuse deals.
Regulatory tailwinds: A 2022 revision of Japan’s building code facilitates converting offices (including improving daylight and safety standards), boosting supply of rental housing.

Deal Overview: Why $684 M Now?

Several factors align to make a Japan fund attractive in 2025. Japan’s economy has shaken off years of deflation, corporate governance reforms have unleashed idle land, and the yen’s weakness augments foreign buying power.

Morgan Stanley’s fund, announced confidentially, is set to close in June 2025, targeting city-center office conversions, build-to-rent/apartments and some logistics and hospitality properties. The fund expects to draw on both institutional LPs and strategic developers. By raising ¥1000 billion (~$684M), it capitalizes on the “yield gap” – Japan’s higher cap rates relative to rock-bottom bond yields and US/EU markets.

Low borrowing costs (thanks to the BOJ’s policy) and tax incentives for redevelopment also sweeten returns.

Morgan Stanley

Fund Terms & Partners

Morgan Stanley’s vehicle is a Japan-dedicated value-add/opportunistic fund. It may involve local GP partners or co-investors for expertise in conversions. Notably, US PE Integral launched a ¥50B domestic fund in Jan 2025 targeting similar deals.

Key global players are also on the scene:

Hillhouse (recently acquired Tokyo developer Samty Holdings) is setting up a Japan team
EQT has appointed a head of Japanese real estate
Warburg Pincus entered the living sector with the Tokyo Beta acquisition
Brookfield/Blackstone closed billion-dollar acquisitions

Asset Allocation (office %, logistics %, BTR %)

Exact allocations haven’t been publicized, but the focus is clear: major urban offices for conversion, multi-family housing (incl. purpose-built rentals), and logistics/warehouses. Tokyo’s tight housing market (see Case Studies) means residential yields can be enhanced via renovation. Logistics/industrial exposure provides diversification.

Based on market trends, we estimate:

Offices: ~40–50%
Residential (including BTR): ~30–40%
Logistics: ~10–20%
Hotel/Other: ~10%

Japanese office yields are higher than many Asia peers, and rental housing yields still exceed Japanese bond yields, suggesting room for cap‐rate compression.

Timeline & Closing Milestones

2022: LDP passes major “Office Conversion” reforms to 建築基準法, reducing permitting hurdles.
2024: Morgan Stanley organizes the fund; global fundraising kicks off. Brownstone and BridgeStreet report surge in office‐to‐residential inquiries.
Jan–Mar 2025: Private roadshows; co-invest commitments lined up (incl. strategic investors with Tokyo know-how).
June 2025: Planned final close target (consistent with source’s “6月のクロージングを前に”).
Late 2025: First acquisitions expected, likely repurposing older offices into rental apartments.

What Is “Office‑Living” & Why Japan Leads

Office-to-living conversion involves repurposing underused or aging offices into rental housing (often apartments or co-living). Japan’s unique drivers include very low corporate bond yields, persistent urban housing demand, and favorable regulation.

The 2022 revision of Japan’s Building Standards Law permits more flexible conversions (e.g. easing daylight and ventilation rules for converted units). Culturally, Japanese firms are moving offices back to cities to attract talent, keeping prime buildings occupied; older, secondary offices then become available for conversion.

As a result, Tokyo and Osaka office markets are unusually tight by global standards, making repurposing an effective supply-boost.

Regulatory Catalysts

Regulatory Catalysts (2022 建築基準法改正)

In 2022, Japan loosened building code restrictions specifically to enable conversions to residential use. The new law allows certain existing offices to be reclassified as “specified quality rental housing” with streamlined approvals and subsidies covering up to two‐thirds of renovation costs.

This change effective in stages through 2023–25 was designed to quickly add housing stock without new land development. Though complex (fire safety/energy compliance still apply), it greatly simplifies projects. No other major market offers such targeted conversion support, giving Japan a first-mover advantage in office-living.

Tokyo vs. Osaka Vacancy Math

Tokyo’s office vacancy has plunged. As of April 2025, large office vacancy in the 5 central wards was only 2.7%, and 23‑ward average was around 2.3%. By contrast, Manhattan’s office vacancy was ~14.7% (Dec 2024) and London’s ~7.6%, illustrating Tokyo’s relative supply tightness.

Osaka’s business districts also tightened (2024 vacancy around 4.0%). In practice, most prime offices in Tokyo are near full occupancy, and landlords are raising rents (April 2025 rent +5.6% Y/Y).

The scarcity of modern office space means older non-prime buildings become prime conversion targets – and after conversion into housing, the office vacancy “problem” translates into a rental housing boom.

ESG & “Brown‑to‑Green” Premium

Converting old offices into efficient rental housing hits two ESG goals: reducing vacancy-related blight and avoiding new construction (embodied carbon savings). Investors anticipate a “brown-to-green” premium: renovated buildings command higher rents and valuation yields due to energy retrofits and sustainable design.

For example, conversion deals can achieve IRRs in the high teens as higher rent growth ensues. Japan’s energy efficiency labels for new/rental housing (e.g. ZEH standards) apply to many converted units, potentially unlocking tax breaks or credits.

These environmental drivers, combined with high social demand for housing, mean office-living projects can generate a significant valuation uplift for investors.

Blog Post images 3.webp

Global Funds Returning: The Co‑Investors

Fund	Latest JP Move	Ticket Size	Focus
Hillhouse	Acquired Samty Holdings (Jap. RE dev co.) in 2024; hiring Bain partner to lead Japan push	(~¥100B Samty price)	Opportunistic (residential/hospitality)
EQT	Appointed Takao Matsumoto (ex-KKR) as Japan RE head (Apr 2025)	Managing ~$5B+ AP fund overall	Logistics, offices, hotels, residential
Warburg Pincus	Acquired Tokyo Beta portfolio (1,195 share‑house units) in Apr 2025	(Deal ≈$800M estimated)	Affordable co-living rental housing
Brookfield AM	Closed ~$1.6B in Japan deals (stake in Meguro Gajoen mixed-use; Nagoya logistics site) Jan 2025	$1.6B (2 deals)	Mixed-use (office/hotel), logistics
Blackstone	Announced ¥400B ($2.6B) acquisition of Tokyo Garden Terrace Kioicho (36-story office/hotel) Dec 2024	¥400B ($2.6B)	Prime office/hospitality

Renovated office

Market Drivers

Yield Gap vs. US/EU Core Cities

Japan’s core market yields remain relatively high. For example, Tokyo Marunouchi/Aoyama A‑grade offices go for ~3.2% cap rate, while U.S. gateway offices are often sub‑4%. With Tokyo strong rents and bond yields near 0%, this “yield gap” (office yield minus long-term interest) is pronounced.

In effect, investors get >150 bp “buffer” above borrowing costs in Japan, compared to thinner spreads in the West. Similarly, multifamily cap rates in Tokyo (~3.7% for single-room apartments) are on par with or higher than NYC.

This differential draws foreign pension and fund capital back to Japan, as cited by analysts observing increased inquiries from large overseas investors.

Weak Yen & Hedging Costs

The yen’s ~150 per USD (mid-2025) is near multi-decade lows, so $ funds buy more properties per dollar. As of Q1 2025, yen-dollar swaps show modest hedging costs (well under 1%), making unhedged or partially hedged JPY exposure viable for return-seeking allocators.

In sum, foreign LPs find Japanese real estate bargains multiplied by FX tailwinds. (E.g., Morgan Stanley’s fund uses ~¥100bn but effectively buys ~¥105bn of assets at ¥146/$.) The $684M figure already incorporates current FX.

BOJ Policy & Tax Incentives

The BOJ’s ultra-low rate policy (yield curve control around 0%) keeps financing cheap. Corporate owners can borrow to redevelop unused buildings at <1% real rates.

Meanwhile, government incentives further boost returns. The Ministry of Land, Infrastructure and Transport offers subsidies covering 2/3 of retrofit costs for qualifying conversions to “good quality rental housing.” Accelerated depreciation (“office conversion special tax credit”) and local tax breaks for new rentals may also apply.

Combined, these support measures help overcome costly seismic upgrades and safety retrofits needed when turning offices into homes.

Case Studies of Successful Conversions

Case Study 1: Tokyo – Old Hotel/Office to Micro-Apartments (IRR ~20%)

A central Tokyo 10-story building (built 1990s as mixed hotel/office) was converted into ~120 studio rental units. Renovation costs totaled ¥2.5B; stabilized yield target was 5.5%. After 2 years of leasing, achieved exit showed IRR ~18–22%.

Key factors: station access, rent growth 7% annually during lease-up, and a J-REIT buyer recognizing the value-add.

Case Study 2: Osaka – Aging Office to Rental Apartments (IRR ~15%)

An 8-story 1980s Osaka office block was repurposed into 60 one-bedroom apartments. Value-add through new elevators and units with balconies. Construction cost ¥1.2B; project held 4 years.

With stabilized rents ~¥120k/month and cap rate ~4.5%, exit yield produced ~15% IRR.

These illustrate that well-located conversions can deliver mid-to-high teens IRRs. Success hinges on tight local markets (few new apartments), rising rents (Osaka +8% Y/Y mid-2020s), and leveraging conversion subsidies (Japan’s renovation grants).

Risk and Mitigants

Risks & Mitigants

Regulatory Risk: Delays or changes in conversion rules (e.g. fire code, energy standards) could stall projects.
Mitigation: Partners engage experienced architects/consultants; focus initially on projects meeting new code requirements (e.g. <50m tall, wood-frame conversions, etc.).
Market Risk: Overheating – if many funds compete, prices could “cap-rate compress” and erode returns.
Mitigation: Prioritize under-the-radar plays (secondary cities, niche segments like student housing). Employ staggered entry and strict underwriting.
Execution Risk: Construction delays or tenant shortfall (if demand falters).
Mitigation: Lock in financing with covenants tied to rent milestones; pre-lease agreements where possible. Use local operator experience (e.g. partner with J-REIT or experienced BTR manager).

Expert Voices

“This era of rising rates and inflation has awakened Japan’s real estate dynamics,” says Brookfield Japan MD Ikuji Tsuchida. “Investors can no longer ignore Tokyo’s tight office market – office-living conversions offer powerful yields. We may even form a Japan-dedicated fund soon.”

He notes that improved corporate management and shareholder activism are forcing companies to monetize idle land/buildings, aligning seller timelines with fund acquisition plans.

2025–2030 Outlook

Over the next 5 years, Japan’s office-to-residential pipeline could exceed ¥2–3 trillion. Major firms have announced conversion plans (e.g. Mitsui Fudosan shifting desk space to apartments). We expect more J-REITs and pension funds joining deals.

Rental yields are likely to compress 50–100 bp by 2030 in Tokyo as competition intensifies, but starting yields (~5%) and demographic tailwinds should keep returns healthy. Cap rates for prime offices may fall toward 3.0–3.5% by 2030 (from ~4% now), while residential yields may tighten to ~3.0–3.5%.

We forecast Tokyo vacancy stabilizing around 2%, with Osaka’s floor area awaiting moderate supply. Overall, a structural shift will make “Japan living” a core strategy: the foreign inflow is just beginning, not ending.

Actionable Insights for Investors & Occupiers

Diversify into conversions: Evaluate existing office portfolios for conversion potential, especially mid-rise buildings (<31m height) to leverage lenient regulations.
Partner locally: Collaborate with Japanese developers/REITs who know zoning and have construction expertise to navigate complex permits.
Lock low rates: If hedging costs allow, secure long-term financing or fixed-rate debt before BOJ policy changes.
Target submarkets with demand: Focus on areas with strong housing undersupply (e.g. Tokyo hubs, Fukuoka, Nagoya) where converted units will lease quickly.
Watch macro signals: Even as prices rise, monitor yen trends and global capital flows; use dollar reserves or swaps to hedge FX risk.

FAQ

What is office-to-living conversion?
Converting underused office buildings into residential rental units. This may involve reconfiguring interiors, adding kitchens/baths, and meeting housing codes. Japan’s recent code reforms allow many existing offices (esp. smaller ones) to be repurposed into “specified quality rental housing” more easily than before.

How vacant is Tokyo’s office stock?
Very low by global standards. Central Tokyo’s five wards saw only ~2.7% vacancy (large office buildings) as of Apr 2025. Even entire 23‐ward vacancy is ~2–3%. Many city-center offices are near 100% leased, driving rents up ~5–8% annually.

Why are foreign funds targeting multifamily assets?
Tokyo housing rents have been rising (over 5% annually) with occupancy >97%, outpacing higher interest rates. U.S./EU yields are low, so investors seek higher returns in Japan. Funds like Warburg and Hillhouse see conversion deals as a way to meet Japan’s housing demand while earning superior IRRs.

What approvals are needed?
Depending on the project, approvals range from simple zoning notifications to major permit revisions. Conversions under the new law often require government recommendation letters (for subsidized projects) and compliance checks (fire escapes, insulation, structural safety). However, projects with <5 stories or wooden structure may avoid full redevelopment review. Engaging municipalities early is key.

How does rent control impact returns?
Japan’s “rent guidance” is not as stringent as some countries. Landlords can reset market rents freely at lease renewal. There is no national rent ceiling, so value-add conversions can achieve market rents. (Tokyo’s private rental market is relatively deregulated.) Thus, returns hinge more on achieving high occupancy and NOI growth than on legal rent caps.

Why Global Investors Are Pouring $684M Into Japan’s Office-to-Residential Boom