Japan Brief: Potential Impact of U.S. Tariffs on the Japanese Real Estate Market

Occupiers in the machinery and transport equipment industries, which account for the majority of exports to the U.S., do not represent a large proportion of the office and logistics leased space in Japan. Also given the long-term nature of the lease contracts and presence of strong structural demand drivers, the short-term impact of any lease cancellations should be limited. The direct impact of a slowdown in consumption of high-priced goods on leasing demand for high street retail space should also be minimal.

However, heightened external uncertainty makes it increasingly possible that occupiers in most industries will adopt a wait-and-see approach when considering signing lease contracts for new space or expansion. As a result, recent strong momentum in office and retail leasing demand and the upward trajectory in rents may subside. This will also negatively impact logistics market fundamentals, creating a particularly difficult situation in Greater Tokyo where oversupply is already a concern.

In the real estate investment market, a more accommodative interest rate environment could serve as a tailwind. The flow of overseas capital may increase as the relative attractiveness of Japan as an investment destination rises. There is also a possibility that real estate transactions will pick up, as Japanese corporates may opt to buy or sell more property if prolonged uncertainties were to encourage them to revisit their real estate strategies. On the other hand, worsening leasing market fundamentals, should they emerge, would prompt investors to turn more selective.

The situation continues to evolve, and the outlook remains highly fluid. Much depends on the outcome of the negotiations between the U.S. and its trade partners. What is certain is that the initial optimism on the outlook has receded.