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New demand for Large Multi-Tenant (LMT) logistics facilities in Japan's three major metropolitan areas is expected to reach 630,000 tsubo in 2020, the third-largest after 2019 and 2018. Even amidst the pandemic, demand for logistics facilities remains robust, ensuring vacancy rates in the greater Tokyo to remain at historically low levels.

One of the major sources of demand is e-commerce. Since 2008, the e-commerce market in Japan has expanded by an average of over 11% per year. The rise in demand for stay-at-home goods amidst the pandemic is seen to have accelerate that pace (FIGURE 1). In order to expand their distribution networks to handle an increased volume of goods, e-commerce platform operators are aggressively pursuing the acquisition of more logistics facilities. Stay-at-home demand not only increased demand for general consumer goods, but also increased the requirement for inventories for such goods. This has reinforced the status of logistics facilities as an essential infrastructure.

Figure 1

Another driver of demand is the automation of logistics operations. As freight volume continues to increase, logistics companies are seeking to implement the latest technological solutions in order to improve efficiency, both within the warehouse and in distribution networks, a process which often requires the simultaneous expansion of warehouse floorspace. To be sure, companies who have been adversely affected by pandemic may be forced to temporarily scale back their capex. However, as labor shortage is viewed as likely to restrict future profits, there is also a sense of urgency to initiate reforms to ensure companies maintain their competitive edge. Also, companies looking to effectively shorten haulage distances between the major metropolises, demand for logistics facilities around regional cities or near transport hubs is on the rise.

Such stable demand has raised the profile of logistics facilities relative to other asset types in the eyes of developers and investors, leading to the planning of significant new supply (FIGURE 2).

Figure 2




While the Greater Tokyo LMT* market in 2020 saw large new supply that trailed only 2018 and 2019, new demand continued to outstrip supply for the second consecutive year. Since reaching a new record low of 0.5% in Q1 2020, the vacancy rate maintained this level through Q3, and appears set to finish the year at similar level. Initially, it was expected that logistics demand would also be somewhat impacted by the pandemic. In reality, however, acceleration in the growth of e-commerce, together with demand for automation to address operation issues such as manpower shortages, have meant that demand has been significant enough to overcome any negative economic effects. Compelling evidence for this assertion can be found in the fact that large contracts signed by logistics and e-commerce companies are on the rise, with nine of the 20 newly-completed buildings this year wholly taken by single tenants.

New supply of 630,000 tsubo is scheduled for 2021 and 890,000 tsubo for 2022, figures that would break all existing records. Despite this, pre-leasing trend continues to accelerate, with tenants already confirmed for over 60% of the new floorspace available in 2021. For this reason, two consecutive years of record-breaking supply is unlikely to overly impact the market balance. While the vacancy rate should rise, it should still remain generally low, with CBRE projecting 1.2% in Q4 2021 and 2.8% in Q4 2022.

With a sub-1% vacancy rate, effective rents in the Greater Tokyo area is projected to have risen by 3% for 2020 as a whole. The large new supply slated for the next couple of years, however, may somewhat slow down the pace of rent rise from here. That said, vacancy rates are still expected to remain fairly low, meaning that rents should continue to trend up. CBRE projects an average annual increase of 1.7% over the next two years, bringing rents to JPY 4,570 per tsubo by Q4 2022.

Figure 3
Figure 4




Vacancy rates for 2020 have remained below 1% in all areas, with almost no vacancies in existing buildings throughout Greater Tokyo. While vacancy rates had trended around 20% in the Ken-o-do area until 2018, they have fallen to around 1% since Q4 of 2019, with little chance of a sudden future increase. The primary factors behind this dramatic shift have been the improved convenience of the Ken-o-do since the road was extended to the Narita Interchange, and the fact that the vacancy rate in the adjoining Route 16 area dropped to 0.1% in Q3 2020, leaving potential tenants with extremely limited options across the wider area.

During 2021, vacancy rates are expected to maintain extremely low levels just above or even below 1% in all areas. From 2022, however, vacancy rates are expected to rise slightly in some areas. Two new facilities are slated for completion in the Tokyo Bay area in 2022, the first time for the area to have two new completions in the same year. As a result, its vacancy rate is projected to increase to 4.8%. Such significant new supply in an area with sparse existing stock means that any vacancies remaining upon completion will automatically push up the vacancy rate in the area as a whole. The Route 16 area, where the most significant amount of new supply is planned, should see vacant floorspace in new properties gradually increase in 2022, leading to a projected vacancy rate of 2.8%. The Ken-o-do area also appears set to be affected by this new supply in the neighboring Route 16 area, with its vacancy rate projected to rise as high as 3.9%.

The Gaikando area is anticipated to be the outlier, maintaining an extremely low vacancy rate. CBRE projects a vacancy rate of just 0.6% in Q4 2022. The area's evaluation as a location for logistics facilities improves every year, due to the advantages it enjoys in terms of transportation convenience and relative ease of securing workforce. Despite its reputation, however, fewer properties are under development in the area compared to other areas, meaning that any new facilities are likely to enter operation with high occupancy rates.

Figure 5
Figure 6




The LMT* vacancy rate in the Greater Osaka area is projected to fall to around 3.7% in Q4 2020. Although 160,000 tsubo of new floorspace has come available during 2020, fresh demand of roughly the same amount is projected.

From 2021 onward, new supply is expected to stimulate demand. While 280,000 tsubo is slated for completion in 2021, close to an all-time high of 290,000 tsubo in 2017, tenants have already been secured for approximately 75% of this floorspace. Demand from potential tenants planning large-scale distribution centers remains strong. Also, new supply in 2022 is less than 100,000 tsubo. Vacancy rate is expected to drop below 2% in 2022.

Effective rents is expected to have rise by more than 4% for the whole of 2020. An average annual increase of approximately 2% is anticipated for the next two years, with Q4 2022 rent projected to reach JPY 4,130 per tsubo.

Figure 7




The LMT* vacancy rate in the Greater Nagoya area for Q4 2020 is projected to be slightly lower than a year ago, at 9.5%. The lack of dramatic drop is mainly due to tenants becoming more cautious as a result of the pandemic.

While only one property (14,000 tsubo) is slated for completion in 2021, 2022 will have six properties due for completion with a total of 150,000 tsubo, a record high for the area, raising the total stock in the region by over 40% in 2022 alone. Thus, an increase in vacancy rate is likely, and CBRE projects a vacancy rate of 12% by Q4 2022. However, we also anticipate that these vacancies will be filled over time, mainly because the new supply contains number of large-scale buildings equipped with ramp ways, a highly sought-after feature that remains rare in the area. Indeed, these projects are attracting attention from tenants looking to either restructure their logistics portfolio or newly expand into the region. Such demand should ensure that effective rents rise by an average of over 1% per year despite an increase in vacancy rate, reaching an estimated JPY 3,680 in Q4 2022.

Figure 8

*LMT: Large Multi-Tenant logistics. More than 10,000 tsubo in the Greater Tokyo Area and the Greater Osaka Area; more than 5,000 tsubo in the Greater Nagoya Area.

Japan Real Estate Market Outlook 2021

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Hiroshi Okubo
Head of Research, Japan
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