Japan - March 2022

S P OT L I G H T
Savills Research

Japan Logistics©ESR LTD

Japan Logistics

Sector remains strong but
latent risks emerging
Summary• In Greater Tokyo, even strong
demand has been unable tokeep pace with the elevated new
supply levels, and vacancy rates
have loosened again to 2.5%.
• On the other hand, vacancy
rates have shrunk to 1.5% inGreater Osaka, as the region
continues to experience robust
demand.
•R ents in Greater Tokyo haverisen by 4.8% year-on-year (YoY)
and now average JPY4,620 per
tsubo.

Graph 1: Supply, Net Absorption and Vacancy in Greater Tokyo, 2010 to 2021
Completions• While logistics real estate has
performed well in recent years,
investors should understand the
key characteristics of the sector
including low land values andthe rising operational costs oftenants.

Net absorption

5Y avg completions (2016-2020)

Vacancy rate (RHS)

3,500

14%

3,000

12%

2,500

10%

2,000

8%

1,500

6%

1,000

4%

500

2%

VACANCY RATE

THOUSAND SQ M

• Rents in Greater Osaka have also
seen notable growth of 4.0%,
and now stand at JPY4,160 per
tsubo.
• In 2021, investment volumes in
the logistics sector were lower
than 2020 levels, but this wasdue to the exceptionally highlevels seen in the previous year.
Interest in the sector remains
robust.

cap rates for prime assets in Tokyo have been
compressed to the low 3% range.
At the same time, the high levels of
attention to the sector have resulted in casesof sharp pricing which could be a concern
when considering the innate risks of thesector. For instance, the thin profit margins
that the logistics industry runs on would
make it challenging to increase rents going
forward as transferring costs to the customer
has been difficult. There are many other risks
that the sector faces, discussed in greater
detail in this report.

INTRODUCTION
Over the past half-year, the interest in logistics
facilities has strengthened, with many investors
pouring capital into the sector as the pandemic
continues to dim the prospects of some otherasset classes. Indeed, despite the all-time highsupply in 2021, an even larger influx of supply is
expected over the coming years, supported by
the ongoing robust leasing demand for logistics
facilities. Rents are at record highs, and vacancy
levels have nevertheless remained low. These
attractive conditions have further stirred
investor appetite for logistics facilities, and

0%

0
2010

2011

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source Ichigo Real Estate Service, Savills Research & Consultancy
Note: Annual periods from February to January. Vacancy rates are as of the year end for each annual period,
while the rate presented for 2021 is as of January 2022.

Graph 2: Greater Tokyo Rent vs Vacancy, Q1/2016 to Q4/2021

Average rent (LHS)

Average vacancy (RHS)

4,700

6%

4,600

5%

4,500
4%

4,400
4,300

3%

4,200

2%

VACANCY RATE

JPY / TSUBO / MONTH• Supply in both 2022 and 2023 is
expected to surpass the record
levels seen in 2021, suggestingthat with the increased
competition, logistics facilities
that are older and poorly locatedmay struggle.

4,100
1%

4,000

Q3

Q4

Q1

Q2

Q3

2020

Q4

Q1

Q2

Q3

2019

Q4

Q1

Q2

Q3

2018

Q4

Q1

Q2

Q3

2017

Q4

Q1

2016

Q2

Q3

Q4

Q1

0%
Q2

3,900
2021

Source Ichigo Real Estate Service, Savills Research & Consultancy
Note: Annual periods from February to January.

savills.co.jp/insight-and-opinion/2

Japan Logistics

MARKET TRENDS
In Greater Tokyo, the logistics sector has
held firm well into the pandemic. Pre-leasing
activity in the market has remained strong
despite the record levels of supply entering
the market in 2021. Nonetheless, supply has
once again outpaced demand, with vacancy
increasing 2.3 percentage points (ppts) to
2.5% YoY. While many facilities have had
successful pre-leasing activity and come onto
the market fully occupied, other facilities
have been affected by the large supply, andwill take more time to lease.
On the other hand, average asking rents in
the Greater Tokyo area have seen the largest
increase since early 2020. Rents currently
stand at JPY4,62 0 per tsubo, having
increased 4.8% YoY. Some of this rental
growth was attributed to the tight supply and

Logistics real estate has maintained
its popularity, and cap rates havecompressed even further as more
capital has been poured into the sector.
Leasing markets have also fared well
despite the rapidly growing supply overthe past few years. However, potential
risks have started to emerge as fierce
competition for acquisitions continues.

Graph 3: Supply, Net Absorption and Vacancy in Greater Osaka, 2010 to 2021
Net absorption

5Y avg completions (2016-2020)

Vacancy rate (RHS)
16%

1,750

14%

1,500

12%

1,250

10%

1,000

8%

750

6%

500

4%

250

2%

VACANCY RATE

THOUSAND SQ M

Completions
2,000

0%

0
2010

2011

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source Ichigo Real Estate Service, Savills Research & Consultancy
Note: Annual periods from February to January. Vacancy rates are as of the year end for each annual period,
while the rate presented for 2021 is as of January 2022.

Graph 4: Greater Osaka Rent vs Vacancy, Q1/2016 to Q4/2021
Average rent (LHS)

Average vacancy (RHS)

4,300

14%
12%
10%

3,900

8%
3,700
6%
3,500

4%

3,300

VACANCY RATE

2%

2020

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

2019

Q4

Q1

Q2

Q3

2018

Q4

Q1

Q2

Q3

2017

Q4

Q1

Q2

Q3

2016

Q4

0%
Q1

3,100
Q2

JPY / TSUBO / MONTH

4,100

2021

Source Ichigo Real Estate Service, Savills Research & Consultancy
Note: Annual periods from February to January.

3high demand in the market. However, thisphase of tight supply in the sector is likely toapproach an end, consequently slowing thestrong rental growth seen at present.
While the growth in rents this halfyear was encouraging, rental growth islikely to slow down going forward. Firstly,
the massive supply forecast for 2022 and2023 will introduce greater competition
into the market, and owners will have to
price rents reasonably in order to attract
tenants. Furthermore, while the pandemic
contributed to the boom in e-commerce overthe past two years and has greatly helped toboost the demand for logistics facilities, it isuncertain if the same growth can be expectedonce the pandemic calms down, as somereturn toward brick-and-mortar stores islikely to occur.
In Greater Osaka, the strength of thelogistics sector could also be seen throughout
2021. Like Greater Tokyo, Greater Osaka also
saw record amount of supply enter the market.
However, the demand in Greater Osaka
exceeded the new supply, and vacancy rates
were compressed even further - shrinking
1.3ppts YoY to 1.5%. Pre-leasing activity has
been strong, and many facilities are alreadyfully occupied upon coming to the market.
Average asking rents in Greater Osaka havegrown to JPY4,160 per tsubo, a 4.0% increase
YoY. The market in Greater Osaka is expected
to remain stable in 2022 due to the low supply
forecast for the year. Nonetheless, there aremany large developments planned past 2023,
which must be taken into consideration.
INCOMING SUPPLYIn Greater Tokyo, a record amount of supply
was seen in 2021. The second half of the year
added more than 1.7 million sq m of new
space into the market, bringing the total
supply in the year to over 3.0 million sq m.

Japan Logistics

nurseries, conference rooms, and gyms to
make the facilities feel like a town. Thesefeatures would make attaining labour easier.
Third-party logistics companies including
Sagawa Express, Seino Transportation, andGion are reported to occupy about 20% of
total leasable space in the facility.
Other large developments that werecompleted in Greater Tokyo include Daiwa
House’s DPL Nagareyama IV, with a GFA

GLP was a major contributor to this, adding
three large logistics facilities with GFAs
totalling almost 600,000 sq m.
The largest addition was the GLPALFALINK Sagamihara I, which had a GFAof 300,000 sq m, and was the first of fivebuildings planned in Sagamihara under its
ALFALINK brand. These facilities span alarge area with an open-concept design andhave various amenities like restaurants,

Graph 5: Annual New Supply* in Japan by Region, 2018 to 2023F
Greater Tokyo

Greater Osaka

Other

7

GFA (MILLION SQ M)

6
5
4
3
2
1
0
2018

2019

2020

2021

2022F

2023F

Source Ichigo Real Estate Service, Savills Research & Consultancy* Projects in 2022 and beyond tend to be added later once details are ready to be announced.
The data only considers facilities with GFAs > 10,000 sq m and is as of February 2022.

Map 1: Upcoming Completions in Chubu and Fukuoka with GFA greater than 50,000
sq m, 2022 to 2024*
Chubu

FukuokaCompletion Year

GFA

2022

50,0002023

100,000

2024

200,000
300,000
400,000

Source Ichigo Real Estate Service, Savills Research & Consultancy* Projects where GFA and/or completion date are unavailable are omitted from the dataset.
New supply data is as of February 2022.

savills.co.jp/insight-and-opinion/

4of over 320,000 sq m, and adds on to themultiple facilities that have been developed in
Nagareyama. This new logistics facility was by
far the largest one built by Daiwa House yet,and it has more plans in the pipeline.
Looking ahead in Greater Tokyo, despite
the record supply in 2021, 2022 and 2023 willboth see almost 30% more supply than 2021.
Given that absorption has already begun toslow in 2021, it is uncertain if the market will
be able to absorb this enormous amount of
new supply.
In Greater Osaka, the amount of new
supply added to the market in 2021 was morethan 1.4 million sq m – around 50% more thanwhat was added in 2020. The largest addition
that was added in the second half of 2021 was
Prologis Park Inagawa 1, which has a GFAof over 200,000 sq m. However, 2022 and2023 only have one logistics facility with over
100,000 sq m planned – DPL Ibaraki-Kita
in mid-2022. The supply forecast in Greater
Osaka for these two years is low overall,which should give the market some breathing
room to absorb the supply.
While a majority of logistics facilities
are built within Greater Tokyo and Greater
Osaka, developers have also taken an interest
in other regions in Japan. For instance, in
Aichi, the tentatively named Nagoya Iwatsuka
logistics centre planned in 2023 will have a
GFA of more than 350,000 sq m to become
one of the largest in the region so far. Daiwa
House will also introduce three logistics
facilities in Aichi between 2022 and 2023:
DPL Meiko-Yatomi I & II, and DPL Komaki,
which will add a total of more than 450,000
sq m of GFA. Further down in the south, a
few large developments are also expected in
Fukuoka past 2023. One new logistics facility
by Mapletree will have a GFA of greaterthan 200,000 sq m, more than double thesize of the largest development recorded in
the region, which was by Daiwa House in2017. Indeed, as Greater Tokyo and Greater
Osaka become increasingly crowded withnew logistics facilities, some developers andinvestors have turned to other major hubs
like Aichi and Fukuoka, where land could be
more affordable and more available.
INVESTMENT TRENDS
According to data aggregated by Real Capital
Analytics (RCA), investment volumes in
2021 were about 25% less than levels seen in2020 and 2019. With the global pandemic
extending fully into 2021, some investment
processes have slowed down in turn.
Investment volumes in the logistics sector
in 2021 have likewise decreased in tandem.
It should be noted, however, that the data ispreliminary and that investment volumes
usually increase later as more transaction
details are confirmed. Furthermore, although
investment volumes in 2021 were lower

Japan Logistics - Evidence of caution

Graph 6: Share of Investment Volumes by Asset Class, 2007 to 2021
Logistics

OfficeResidential

RetailHospitality

Other

Total
10

90%

9

80%

8

70%

7

60%

6

50%

5

40%

4

30%

3

20%

2

10%

1

0%

0

JPY TRILLIONPROPORTION OF INVESTMENT (%)

100%

Source RCA, Savills Research & Consultancy

Graph 7: Six-month-ahead Expectations for Rent and Capital Appreciation, 2008 to
1H/2022
Rents

Capital values

100

-80

66.3
53.3

53.3

66.8

1H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

-86.2

-100

2H

-60

1H

-40

2H

0
-20

1H

20

2H

40

66.7 66.3
67.5
56.2
48.843.2
38.0
50.5 48.8
50.7
29.9 38.9
27.3
45.1
41
29.7
34.8
22.6 25.9 25.3 37.0
25.6
28.6
13.8
28.4
28.7 23.1
8.4
21.0
7.7
18.7
13.0
14.1
19.2
5.0
6.9
-14.8 -4.8
-13.1
-6.3
-3.7
-20.5
-15.9
-25.9
-37.7
-42.0 -63.9 -40.3

1H

DIFFUSION INDEX

60

78.0 80.9 74.3 75.0

69.2

2H

80

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 22
Source Ichigo Real Estate Service, Savills Research & Consultancy

Table 1: Selected Investments, announced September 2021 to February 2022

PROPERTY NAME

TRANSACTIONVALUE (JPY BIL)

APPRAISALDIRECT CAP
RATE

BUYER

SELLERESR Japan Income
Fund Portfolio(4 facilities)

234.4

-

ESR Japan
Income FundESR Cayman

Daiwa House REIT
Portfolio(3 facilities)

58.0

3.8% to 4.3%

Daiwa House REIT

Daiwa House
Industry

Prologis REIT Portfolio(3 facilities)

57.7

4.0% to 4.5%

Nippon Prologis
REIT

SPC of Prologis

Mitsui Fudosan
Logistics Park
Portfolio(3 facilities)

44.6

3.9% to 4.2%

Mitsui Fudosan
Logistics Park

Mitsui Fudosan

Kuwana Logistics
Center

35.0-

Mapletree
Logistics Trust

Undisclosed

Source Company Disclosures, Nikkei RE, Savills Research & Consultancy

5than 2020 and 2019, they were still notably
higher years prior to 2018, demonstrating
the continued interest in the sector. On topof that, many big-ticket J-REIT transactions
were also recorded in the second half of 2021.
Indeed, many more players have become
increasingly active in the market. For instance,in the second half of 2021, Nippon Steel Kowa
announced the construction of a new logistics
facility with more than 200,000 sq m of GFA –more than twice as large as its current largest
development that was completed in 2021.
Capitaland has also announced its intention
to invest JPY100 billion more in Japanesereal estate, with a focus on developing andoperating logistics facilities. Furthermore, themarket saw a particularly large transaction
from ESR Japan Income Fund, which isa joint investment fund by ESR and fourother investors, including AXA Investment
Managers and GIC. In this transaction, four
facilities valued at a total of US$2.1 billion
were acquired, including the US$1 billion ESR
Amagasaki Distribution Centre.
New international players have also
made their way into the Japanese industrial
market. For instance, in early 2022, Hines
announced its first logistics acquisition anddevelopment in Nagoya, which is expected
to total over 225,000 sq m. The development
will be named Yatomi Distribution Center,and is expected to serve both ambientstorage and cold storage users. In late2021, ST Telemedia Global Data Centres,
a data centre operator based in Singapore,
announced its plans to develop two newdata centres in Tokyo with Goodman
Group, making its entry into the Japanesedata centre market. Another new entrant
was EQT Exeter, who has started expanding
its footprint in Japan with the acquisition ofBear Logi, a logistics investment manager.
The Japan logistics sector has kept attracting
international capital, and more transactions
are expected in 2022. Given the fierce
competition in the acquisition market, theoption of development has also become
increasingly popular, which appears to have
led to the new record logistics land prices inTokyo late last year.
Overall, the logistics sector has received
a lot of attention throughout the pandemic,
with many deals seen over the past few years,
and with large amounts of capital being
invested into developing increasingly larger
logistics facilities. At the same time, the highamount of interest poured in over a relatively
short period of time might also be a cause
for concern in the industry. According to
the 29th bi-annual survey market sentimentconducted by Ichigo Real Estate Service, eventhough two thirds of respondents expect
capital values of facilities to increase, morethan half expected rents to stay flat, showingthat some optimism over rental growth has
waned.

Japan Logistics

POTENTIAL RISKS OF THE LOGISTICS
SECTOR
The pandemic expedited growth in the
e-commerce in Japan, which in turn spurred theneed for more logistics facilities to keep up withthe rapidly changing environment and to meetcustomer demand. As a result, many investors
have been attracted to the logistics sector and cap
rates of prime logistics in Greater Tokyo have been
compressed to the low 3% levels – lower than thoseof sectors with a longer track record, like Grade B
offices and residential. While the interest garnered
has helped to grow the industry further, the rapidly
compressed cap rates could be a harbinger of someoverheating present in the market.
Indeed, while the high demand for logistics
facilities at present is likely to remain, there aresome risks in the sector that need to be taken into
account. For instance, the unique characteristicsof the logistics sector, such as the low land value,
the difficulty of tenant diversification, andchronic labour shortage may disrupt the sector.
Potential increments of logistics-related costs
may incentivise tenants of logistics facilities tonegotiate with owners for lower rents. In addition,
there is a dire shortage of labour in the logistics
industry, and the costs of training and hiring newlabour have therefore increased. These factors
will put a growing amount of strain on the alreadyrazor-thin margins in the industry, because it willprobably remain difficult to transfer these costs on
to consumers.
Going forward, the rapidly growing large supply
in 2022 and 2023 are another concern. If the waveof supply in coming years loosens the currently

tight market conditions, tenants may gain morenegotiation power. Investors should get ready to
manage risks by diversifying their portfolios,
making facility improvements, and strengthening
relationships with tenants. Please refer to our[Japan logistics – Evidence of caution] report for
further analysis.
OUTLOOK
The fundamentals of the logistics sector remainstrong. Vacancy levels are low despite the record
supply in 2021. It has retained the interest of many
investors who are keen on purchasing logistics
facilities. The sector has undoubtedly strengthened
and maintained its popularity throughout
the pandemic, especially when looking at theamount of attention it has received. The many
developments in the pipeline and new entrants
to the market also demonstrate a large amount ofconfidence in the sector.
At the same time, the overwhelming attention
that the logistics sector has received may also be
a sign that there is some overheating amidst theexcitement present. Some investors, especially
new entrants under strong pressure to deploy
capital, may have turned to the logistics sector
in desperation. As a result, cap rates for logistics
facilities have been rapidly compressed and latentrisks have become more apparent. Given thiscontext, emerging asset classes like data centres
may be a more attractive option with more limitedcompetition. For instance, as of early 2022, GLP
has raised JPY1 trillion to be invested into theJapanese industrial sector, with a focus on data
centres, across the nation.

The risks that are particularly relevant tologistics properties are its low land value, limited
tenant diversification, and increasing development
costs. Although these risks by themselves will not
likely be the downfall of the sector, they are likely
to exacerbate the consequences of a downturn
when the market experiences corrections. Goingforward, another worry for the logistics industry is
the large supply upcoming in 2022 and 2023. Bothyears are forecast to set new records for supply,and it is uncertain if the market will be able tosmoothly absorb such a large amount.
Overall, while the logistics market remains
strong and experienced investors can capitaliseon the growing demand while managing risks,
the market also appears to have some blind spots.
In the current environment where cap rates aresubstantially compressed and development costs
are significantly heightened, even a moderatecorrection could lead to significant consequences.
Investors should be cautious and think twice
before aggressively underwriting new assets. On
the other hand, careful and diligent investors
should become better off when the market faces
harder times.

For more information about this report, please contact us
Savills Japan

Christian Mancini
CEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Savills Research

Tetsuya Kaneko
Managing Director, Head of
Research & Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Pacific+852 2842 4573
ssmith@savills.com.hk

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