CBRE Fast Forwards to 2030 with Special Report "The Future of Real Estate: Shaped by People, Technology, and the Environment"

CBRE today released a special report "The Future of Real Estate: Shaped by People, Technology, and the Environment" which examines how the real estate market in Japan will change over the next decade, driven by three major structural changes – people, technology, and the environment. The report analyzes the impact of these trends by sector: office, logistics, retail, hotel, data center, and the real estate investment market as a whole.

Office
In the past, employees had to adapt to offices. In the future, roles will reverse and offices will need to adapt to suit employees.

The next decade will see a greater geographic dispersion of offices across the metropolis. Three factors are driving this trend:

1. Increased demographic diversity among office workers (e.g. age/generational diversity)
2. Infrastructure development plans in Tokyo over the next 10 years
3. Further advancement and penetration of technology that will significantly improve connectivity, especially with remote locations.

The development of Artificial Intelligence (AI) and Internet of Things (IoT) will also help to realize optimal office environments for individuals. For landlords, it seems likely that their primary clients will no longer be tenant companies, but individual office employees.

To meet the growing interest in sustainability, tenants will start to place greater importance on a building's environmental performance when considering leasing options. This could then translate to higher revenues for owners of buildings that are environmentally conscious.

Retail
The rise of "green consumers" is likely to change the way retailers select spaces. Similar to the office sector, a building/space's strong environmental performance will become a competitive edge and in turn boost rent levels.

With e-commerce continuing to grow at a rapid pace, there are questions about the need for physical stores. CBRE believes that brick-and-mortar stores are here to stay. Nevertheless, to stay competitive and flourish in an ever increasingly digital world, physical stores must evolve to meet consumer expectations and needs.

The factors driving the evolution of physical stores include the following: the shrinking population; an aging society; a shift in customer base (and shift in their values) driven by millennials and Generation Z; and technology.

Store network reorganization is likely to intensify in the coming years as retailers merge or form alliances. Factors such as the provision of high value-added products and services, and the enhancement of entertainment elements, will also become increasingly important in the management of physical stores.

Some retailers are already using Virtual Reality (VR) and Augmented Reality (AR) to allow customers to experience products. This is part of a general shift towards offering stronger entertainment and experiential elements. The introduction of Mixed Reality (MR) will also significantly affect the strategies of physical stores. The evolution of technology will also impact marketing strategies and approaches. Following the advent of omni-channel strategies in recent years, the spread of "unified commerce" in the coming decade is likely to boost purchasing rates.

Logistics
Along with the growth of e-commerce, demand for state-of-the-art logistics facilities is expected to increase. In particular, the rising participation of women in the workforce and Japan's aging society are set to increase home delivery of food products and therefore an increase in cold storage warehouses. We may also see the emergence of warehouses housing centralized kitchens for home food delivery.

As home delivery of fresh food gains popularity, it is likely to become even more important for warehouses to be located close to where consumers live. This is set to result in increased demand for last-mile warehouses located close to residential areas, even if they are only small in scale. Meanwhile, in places located some distance from the city center, residential areas, or the consumer, cutting-edge logistics centers incorporating robots and automation equipment are likely to become more common, benefiting from their larger scale and relatively lower rent levels.

CBRE estimates that warehouses aged 50 years or over will make up over 30% of all warehouses in Tokyo in 2030. Up until now, strong demand has ensured that even obsolete facilities have continued to attract tenants. However, heightened environmental awareness is likely to promote the redevelopment of aging warehouses in the coming years. Additionally, more occupiers are looking to enhance their Environmental, Social and Governance (ESG) rating, suggesting that as well as the age of a logistics facility, environmental performance will be a key factor when attracting tenants.

Hotels
While there are concerns about the present large volume of new hotel supply in the pipeline, there will be little risk of oversupply over the next decade. Existing hotel stock will be insufficient to meet the anticipated expansion of inbound demand over the medium to long-term, in both quantity or quality.

The increasing use of technology should help to address concerns about the labor shortage currently affecting the hospitality sector. If the savings in manpower are allocated to providing guests with service of higher quality, customer satisfaction will improve, and this in turn should boost revenue per available room (RevPAR).

Greater diversity in the nationalities and preferences of guests is also likely to affect the selection of hotels. If hotels are scored on their environmental initiatives, or an international system of environmental accreditation for hotels becomes more recognized, this could become a new criterion for hotel selection.

Data Centers
The spread of AI and IoT, and the increased use of big data, have led to a surge in data traffic in Japan. Over the next decade, data centers supporting this traffic are likely to become essential infrastructure, akin to power, gas, water, and public transport. However, it takes around three to five years to develop a data center, meaning that there could well be a shortage of this asset class in the future. This means that as well as new development, conversion and re-use of existing buildings will become an option.

The specifications required for data centers will also become increasingly sophisticated. This means that the funds required for development and upgrade of facilities will also increase. In the coming years, CBRE expects to see more cases of co-investment with partners and the use of real estate funds. Further separation of ownership and management will encourage more capital to target data centers for investment.

Data centers use far more energy than other major asset types. Consequently, environmental measures will be essential in the development of future data centers, including energy saving and the use of renewable energy. In fact, "green data centers" could be even better suited to ESG investment in comparison with other asset types due to their sustainable development and operation.

Investment
Demand for investment in real estate, which offers the prospect of relatively higher yields and stable income compared with other financial products, is likely to grow further over the next decade as Japan cements its status as an attractive destination for institutional investors' long-term funds, including pensions.

CBRE expects that almost all asset types will become "operational assets." Even a core asset such as an office could see significant fluctuations in cash flow depending on whether its owner can respond to tenants' needs. As a result, the importance of asset management in real estate investment will increase steadily. Moreover, with the increasing professionalization of real estate investment, we may see more cases of non-real estate companies selling the buildings they own, a trend which should also help to improve liquidity in the real estate investment market.

For further details, please refer to our special report, "The Future of Real Estate: Shaped by People, Technology, and the Environment."
https://www.cbre.co.jp/en/research-reports/all-japan-reports

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