Market Outlook 2023 (EN)

Market Outlook Intelligent Investment 202

REPORT

JAPAN REAL ESTATE CBRE RESEARCH ASIA PACIFIC

Contents

Economy

The moderate recovery of the Japanese economy is expected to continue in 2023, driven by consumer spending and corporate capital investment. However, with the output gap still negative, the Bank of Japan (BoJ) has made it clear that it will retain its loose monetary policy for the time being. If the economic recovery were to lead to a rise in corporate earnings as well as real wages, thereby maintaining moderate inflation, the likelihood of a shift to a tighter monetary policy would increase. However, the consensus is that such a move, were it to eventuate, would not occur until H2 2023 at the earliest.

Office

While relocations to higher grade office buildings were on the rise in 2022, downsizings and consolidations were still widely observed, leading to a general upward trend in vacancy rates. As an increasing number of companies favor the implementation of hybrid working schemes, tenants are likely to become more selective than before with respect to office specifications. With increases in supply forecast for most cities, market rents are likely to continue to fall.

Retail

The Ginza highstreet market will continue to be driven primarily by demand from luxury goods brands in 2023. While high street rents appear to have bottomed and maintaining the low levels, they should begin to rise once again in Q4 2022 and continue to slowly increase thereafter.

Logistics

Unprecedented volumes of new supply is expected across Japan in 2023, due to the greater focus placed on logistics properties by developers. As a result, vacancy rates are expected to rise in all four metropolitan areas, despite continued robust tenant demand for logistics space.

Investment

Commercial real estate transaction volume in Japan for 2022 is expected to be slightly lower than the previous year’s level. Nevertheless, expected yields have continued to decline, indicating that investor appetite remains stable. Some investors have become more selective amid overseas interest rate hikes and concerns over a possible recession in US and Europe. However, the BoJ appears unlikely to tighten its monetary policy in the short term, and appetite for Japan real estate looks set to remain robust in 2023.

The moderate recovery of the Japanese economy is expected to continue in 2023, driven by consumer spending and corporate capital investment. However, with the output gap still negative, the BoJ has made it clear that it will retain its loose monetary policy for the time being. If the economic recovery were to lead to a rise in corporate earnings as well as real wages, thereby maintaining moderate inflation, the likelihood of a shift to a tighter monetary policy would increase. However, the consensus is that such a move, were it to eventuate, would not occur until H2 2023 at the earliest.

Japanese economy to continue its slow recovery

After shrinking by 4.3% in 2020, the Japanese economy has generally maintained positive growth ever since, albeit with the occasional short-term regression (Figure 1) . The lifting of all measures to contain the spread of COVID-19 at the end of March 2022 led to a rise in private consumption and corporate capex in Q2 2022 . Although the most recent quarter (Q3 2022) showed a 0.8% q-o-q decline in real GDP on an annualized basis, this was largely due to a temporary increase in imported services. With individual spending and capital investment both continuing their positive growth, GDP is expected to expand in Q4 2022.

Compared to the most recent peak of JPY 557 trillion (annualized) recorded in Q3 2019, just before the latest consumption tax rate hike, GDP continues to be below pre-pandemic levels, registering JPY 546 trillion in Q3 2022. While Japan never instituted any strict lockdowns, numerous state of emergency declarations and the other restrictive measures continued through until March 2022, delaying the reopening of the economy in comparison to other nations. The lifting of border restrictions in Japan also took much longer than it did in other countries.

The removal of daily caps on visitor numbers and the lifting of the embargo on individual tourism on October 11th have fueled expectations for the recovery of inbound tourist demand Without the full-scale return of tourism from mainland China, however, which accounted for almost 40% of individual tourist consumption prior to the pandemic, neither visitor numbers nor inbound tourist spending is likely to reach pre -pandemic levels. In contrast, domestic consumers possess ample spending power as a result of increased savings during the pandemic, suggesting that individual spending should continue to drive the economic recovery The rise in the cost of everyday items, however, is likely to slow the pace of the rebound. In terms of corporate capital investment, pent-up demand caused by under- investment during the pandemic should begin to manifest itself in actual spending figures in the coming quarters.

Figure 1: Real GDP q-o-q growth and major contributing items

Source: Japanese Cabinet Office, CBRE, November 2022.

Easy monetary policy set to continue

While the core consumer price index (excluding fresh foodstuffs) recorded a 3.6% y-o-y increase in October 2022, the largest such rise in approx. 40 years, it remains well below the 7.1% (Nov) in the U S (as of Nov) and the 11 1% in the UK (as of Oct) As large portion of the inflation in Japan is attributable to rising energy and food costs, the situation is quite different from the U.S., where the cause of the inflation is seen to be mainly driven by surge in demand. Indeed, the fact that there is a wide gap between rises in producer price and consumer price is indicative of the difficulties companies are having in passing on their cost increases to final product prices.

In light of such economic situation, the BoJ is committed to maintaining its loose monetary policy. With Japan’s output gap still negative, the BoJ has indicated that this is no time for monetary tightening, opting to keep its long-term interest rates within the -0.25% to 0.25% bracket.

The BoJ’s commitment to its easy monetary policy stands in stark contrast to the monetary tightening being implemented by the central banks of most other major nations in order to keep inflation under control. Should the Japanese economy continue to recover to the extent that real wages begin to rise as well as corporate profits, then a virtuous cycle could be created that pushes overall prices gently upwards The BoJ’s current stance is that it would look to normalize the monetary policy should this scenario occur . With US and Europe increasingly likely to enter a recession, however, most observers believe that H 2 2023 is the earliest that any such change in policy in Japan would be possible.

Figure 3: Inflation rates

12%

9%

6%

3%

0%

-3%

2017.01 2017.04 2017.07 2017.10 2018.01 2018.04 2018.07 2018.10 2019.01 2019.04 2019.07 2019.10 2020.01 2020.04 2020.07 2020.10 2021.01 2021.04 2021.07 2021.10 2022.01 2022.04 2022.07 2022.10

Domestic producer price index Consumer price index (excl. fresh food)

Source: Datastream, CBRE, November 2022.

Figure 4: 10-year Japan government bond yield

0.25

0.20

0.15

0.10

0.05

0.00

-0.05

%

2021.01 2021.02 2021.03 2021.04 2021.05 2021.06 2021.07 2021.08 2021.09 2021.10 2021.11 2021.12 2022.01 2022.02 2022.03 2022.04 2022.05 2022.06 2022.07 2022.08 2022.09 2022.10

Source: Datastream, CBRE, November 2022.

Global economy projected to experience moderate recession

Emerging geopolitical risks, increasing energy costs and other costs of living, together with the hiking of interest rates in order to suppress inflation, have led CBRE to project a moderate global economic recession centered upon Europe and North America in 2023 In both the U S and Europe, however, the extent of this recession should be limited. The reasons for anticipating the recession to be short-lived are as follows:

• Despite the recent rises in cost of living and interest rates, individual consumption and corporate capital expenditure remain consistently robust.

• Although some major IT firms have implemented layoffs, globally there remain more jobs than the number of job seekers. This suggests that large waves of forced redundancies are unlikely to spread to other industries, meaning that individual spending in the West is unlikely to slump significantly.

• With corporate appetite for IT investment remaining strong, the digital economy is forecasted to continue to grow. Corporations also remain keen to invest in the fields of life science and biotechnology.

Rising interest rates are expected to keep the U.S.’s 2023 GDP unchanged from its current levels.

Provided the economy does not worsen to the extent seen during the global economic crisis, the unemployment rate is unlikely to rise too significantly above its current level of 3 7% and should not reach anything like the 6% levels seen in previous recessions. As they are more prone to the effects of rising energy costs, however, European economies are likely to worsen more significantly . Asia Pacific should remain in relatively more robust economic health due to the fact that inflation in the region has been kept in check and governmental policies are expected to be implemented in order to avoid recession.

Figure 5: Real GDP growth, U.S. & Europe

10%

8%

6%

4%

2%

0%

-2%

Source: CBRE, November 2022.

Figure 6: Real GDP growth, APAC

Forecast Forecast

2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 2024 Q4 U.S. Eurozone U.K. 0% 1% 2% 3% 4% 5% 6% 7%

2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2024 Q1 2024 Q2 2024 Q3 2024 Q4

Japan South Korea Australia China

Source: CBRE, November 2022.

02

Office

While relocations to higher grade office buildings were on the rise in 2022, downsizings and consolidations were widely observed, leading to a general upward trend in vacancy rates. As an increasing number of companies favor the implementation of hybrid working schemes, tenants are likely to become more selective than before with respect to office specifications. With increases in supply forecast for most cities, rents are likely to continue to fall.

Robust demand for competitive buildings

Increased tenant activity has been observed since the start of 2022 , with more companies relocating to buildings of higher grades, to superior locations, or to larger premises The implementation of hybrid working combining office and remote work has frequently acted as a catalyst for office relocations, with the volume of newly leased floor area returning to pre-pandemic levels (Figure 1).

Demand for Grade A offices and others with competitive advantages has remained robust. The Grade A vacancy rate fell by 0.5 points to 2 .0% in Q1 2022, representing the first q-o-q decline since Q2 2020 While new supply pushed the vacancy rate back up to 3 8% in Q3 2022 , it has remained consistently below the vacancy rates for other grades since Q4 2020 . Office downsizings and consolidations have also been widely observed, however, with large vacancies arising in less competitive buildings. The All- Grade vacancy rate has been increasing since Q2 2020, reaching 4.9% in Q3 2022, up 1.3 points from a year ago.

With much new supply slated for 2023, rents are being lowered, particularly at larger buildings preparing to face new competition. By Q3 2022, All-Grade rents had fallen by a total of 8.6% from their peak in Q1 2020 . With Grade A buildings having recorded a decline of 10 .9% over the same period, the largest fall of any grade, some properties in this category are offering good value for money. One of the reasons that the Grade A vacancy rate has been kept relatively in check is that rents have been more aggressively lowered than in other grades, expanding the range of companies that can afford leases.

Figure 1: Estimated total take-up in Tokyo 23 wards (Indexed)

*Estimated total take-up is indexed to the average of each period from 2015 to 2019 as 100. Aggregation target is rental office buildings with a total floor area of 500 tsubo or more

CBRE, Q3 2022.

Tokyo (cont.)

Office tenants becoming more selective

Tenants are becoming more selective with respect to office specifications, with demand on the rise for higher-grade buildings in superior locations asking rents that provide good value for money This is a result of factors including more available options due to increasing vacancy, and rising cost consciousness driven by higher material costs. With the surge in implementation of remote working practices triggered by the COVID-19 pandemic, furthermore, many companies have recalibrated their office needs in terms of both space and functionality. These office reforms have meant that many companies are now demanding more from their offices than they used to during the days of complete office attendance . Issues prioritized when relocating to new premises tend to differ significantly between companies which have already introduced hybrid working schemes and those which have not, with the former recording higher responses for all items (Figure 2), underscoring their desire for higher quality premises.

Figure 2: Prioritized criteria for new office building selection (differences between hybrid work and full attendance companies)

90%

80%

70%

60%

50%

1st 2nd 4th 3rd 5th 6th 8th 7th 9th 10th 11th

40%

30%

1st 2nd 3rd 5th 4th 6th 7th 12th 10th 10th 12th 20%

Transport convenience (commuting) Cost (including rent, utilities, admin, etc) Transport convenience (sales activities) Location (reputation, industrial density) Comfort (air conditioning, lighting, etc) Security Earthquakeproofing Business continuity planning (BCP) Building management systems (cleaning, etc) Building grade Recruitment advantages

Total Hybrid work companies Full attendance companies (n=221)

Source: CBRE, March 2022, ”2022 Japan Office Occupier Survey”

Tokyo (cont.)

Limited impact on office demand from remote working

While office-based work is still regarded as the norm in Japan, a large number of companies continue to operate hybrid working schemes. According to the results of a recent CBRE occupier survey of companies in the Greater Tokyo, some 70% answered that they planned to continue using remote working practices (Figure 3) However, the median office attendance rate for those companies who indicated they planned to offer remote working as an option was 70%, with a similar figure estimated for two to three years into the future (Figure 4). This suggests that any decline in office demand as a result of permeation of remote working is likely to be limited in scale, and that buildings offering superior lease terms are likely to continue to attract tenants.

Figure 3: Of the companies implementing remote work, plans to continue remote work in the future

69.7% 8.7% 21.6%

0% 20% 40% 60% 80% 100%

Continue Not continued Under consideration

Source: Events and Planning Unit, Nikkei Inc. Investigation: Nikkei Research Inc. Cooperation for investigation: CBRE ” Survey on office usage”, August 2022

Figure 4: Office attendance rates current (Jul-Aug 2022) and future (2-3 years later)

Current (Jul-Aug 2022) Future (2-3 years later)

Median 70% 70% (n=132) (Response rate) (Office attendance rates )

(2-3 years later)

Source: Events and Planning Unit, Nikkei Inc. Investigation: Nikkei Research Inc. Cooperation for investigation: CBRE ” Survey on office usage”, August 2022

Tokyo (cont.)

Office requirements continue to become more diverse and sophisticated

Corporate interest in sustainability has risen in recent years. Among the related issues, most companies place the highest priority on worker health and well-being (Figure 5) This suggests that more firms are likely to look to create workplace environments that promote staff well-being in order to improve productivity, as well as to attract and retain talents. Tenants’ office requirements are therefore likely to become more diversified and sophisticated than ever before.

At the same time, the Japanese economy is projected to continue to recover, albeit at a moderate pace . As such, relocations to higher grade buildings and expansions should continue to increase . It is likely, however, that any rebound in demand for office space driven by an economic recovery will be less dramatic than it would have been prior to the pandemic, as a result of office expansion needs being somewhat suppressed by the proliferation of hybrid working styles. Under hybrid working schemes, a certain level of staff increases can be handled by adjusting office attendance rates, without the need to expand actual office floor space. Indeed, an increasing number of companies are now factoring in hybrid work to keep their required office floor space below what it would have been prior to the pandemic.

Figure 5: Sustainability priorities for business activities (up to three responses allowed)

Improving employee health and well-being

Reducing greenhouse gas emissions

Targets around energy emissions

We do not have any sustainability priorities

Improving social mobility, social justice, equality and/or diversity

Reduction in air, water, or land pollution Increasing use of local suppliers

Source: Events and Planning Unit, Nikkei Inc. Investigation: Nikkei Research Inc. Cooperation for investigation: CBRE ” Survey on office usage”, August 2022

Tokyo (cont.)

Significant Grade A supply to stimulate office relocation demand

CBRE expects the Grade A vacancy rate to peak in 2023, when abundant supply is planned, before falling thereafter New supply in 2023 across all grades is projected to reach 240 ,000 tsubo, 30% above the annual average over the past few years. Some 190,000 tsubo, or 80% of this amount, is Grade A floor space, approximately double the grade’s annual average supply. Pre- leasing progress for these Grade A buildings remains slow, with many of them likely to come on stream less than fully occupied. With a certain number of secondary vacancies also projected to appear in existing Grade A buildings, CBRE forecasts the Grade A vacancy rate to reach 5 2% by Q4 2023, an increase of 1.4 points from Q3 2022.

However, as Grade A buildings will still provide companies with the most appropriate solutions for companies to meet their ever diversifying and increasingly sophisticated needs, vacancies should be steadily filled. New office buildings planned for development are increasingly likely to feature a wide range of amenities such as retail outlets, hotels, medical clinics, or schools, and are more likely to have wellness or environmental certification, high-level Business Continuity Processing (BCP) functionality, and renewable energy capabilities. As a result, while the Grade A vacancy rate may experience a slight surge in 2025 on the back of more supply-demand factors, it should generally decline gradually from its peak in 2023. CBRE projects the Grade A vacancy rate for Q4 2025 to be at 4.5%, only 0.7 points above the current Q3 2022 level, and the lowest of all three grades.

300,000

250,000

Forecast

tsubo

10%

8%

100,000

50,000

150,000 2020

200,000 2022

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: CBRE, Q3 2022.

2021

6%

6.1% 6.9% 5.3% 6.4% 5.1%

4.5%

4%

2%

6.1% 0%

12% 0

Grade A Vacancy Rate(RHS) Grade A-minus Vacancy Rate(RHS) Grade B Vacancy Rate(RHS) All-grade Vacancy Rate(RHS)

Tokyo (cont.)

Rents continue to drop slightly across all grades

The vacancy rates for other grades of office are projected to continue rising through until 2025 . Grade A-minus offices are likely to bear the brunt of the effect of new Grade A supply, with significant vacancies set to appear in buildings without major competitive advantages. CBRE projects the Grade A-minus vacancy rate for Q4 2025 to rise by 1.1 points from its current level to 6.9%, the highest level among all three grades. Despite the fact that Grade B buildings are accessible to companies of all sizes from a wide range of industries, vacancies are expected to increase in less competitive properties as a result of consolidations or relocations to newly completed premises. The Q4 2025 Grade B vacancy rate is projected to reach 6 .4%, up 1.5 points from its current level, which is the largest increase among all grades (Figure 6). Rents should continue to decline across all grades, but larger drops are likely to be seen in lower grades. Estimated achievable rents for Grade A buildings in Q4 2025 are JPY 31,150 per tsubo, a 10.4% decline from the level as of Q3 2022 . Rents are expected to be further lowered for less competitive Grade A-minus buildings, with an 11 0% decline from current levels to JPY 21,350 per tsubo predicted. As Grade B buildings are anticipated to see the most significant rise in vacancy rate between now and 2025, rents are expected to fall to JPY 19 ,050 per tsubo across the same period, a decline of 12 .0% from current levels and a slightly sharper downturn than those seen in other grades (Figure 7).

Figure 7: Tokyo assumed achievable rents

JPY/tsubo

45,000

40,000

35,000

30,000

25,000

20,000

34,450 31,150 23,800 21,350 21,550 19,050 21,460 19,260 15,000

50,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Grade A Grade A-minus Grade B All Grade

Source: CBRE, Q3 2022.

Osaka

Abundant supply in 2024 to push Grade A vacancy rate above 10%

02 Office Forecast

All-grade new supply for 2022 was 52 ,000 tsubo (including 38,000 tsubo of Grade A space), and was double the past yearly average With net absorption falling once more, as was the case in 2021, almost all new buildings commenced operation at less than full occupancy. The Grade A vacancy rate registered a y-o-y increase of 2 .8 points to reach 4.7% in Q3 2022. As in 2021, most vacancies filled in 2022 comprised smaller units. Medium-sized buildings offering good value for their location or grade were the most popular, with vacancies filled by upgrading or expansionary relocations.

Since the beginning of 2022, corporate interest in improving office environments has been on the rise, with demand increasing for higher grade buildings in superior locations Currently, landlords are lowering rents for properties with vacancies, particularly Grade A buildings and others in higher price brackets, which should lead to greater tenant interest in Grade A properties. With no new Grade A supply slated for 2023, the Grade A vacancy rate is projected to drop to 3.6% by Q4 2023. In 2024, a record 93,000 tsubo of new supply is due to come on stream, 80,000 tsubo of which is Grade A office space, equivalent to over 20% of the existing Grade A stock of 360,000 tsubo With many of them expected to commence operation with vacancies, CBRE projects the Q4 2024 Grade A vacancy rate to reach 10 .2%. In light of the 27,000 tsubo of new supply currently anticipated in 2025 , the vacancy rate should reach 10.4% by the end of that year, which would mark a 5 .7- point increase from the current level.

100,000

tsubo

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

90,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

10.4% 3.8% 5.3% 4.0%

12%

9%

Source: CBRE, Q3 2022.

Grade A New Supply Other New Supply

Grade A Vacancy Rate (RHS) Grade B Vacancy Rate (RHS) All Grade Vacancy Rate(RHS)

6%

3%

6.4% 0%

15% 0

02 Office

Osaka (cont.)

Grade B rents expected to fall more significantly

The loosening of the supply-demand balance should ensure rents continue to fall. Compared to their most recent peaks, Grade A rents for Q3 2022 are down by 7 7% from Q1 2020, while Grade B rents have slipped by 4.2% from Q3 2020 . With Grade A rents having dropped more significantly, the gap between the two grades has narrowed. As such, Grade B rents are likely to begin to fall somewhat more steeply in the coming years. CBRE expects achievable rents to slip to JPY 22 ,250 per tsubo for Grade A and JPY 13,150 for Grade B by Q4 2025 , down from their Q3 2022 level by 9 0% and 11 1%, respectively (Figure 9)

29,000

JPY/tsubo

Forecast

25,000

23,000

21,000

19,000

17,000

15,000

13,000

11,000

24,300 22,250 14,750 13,150 14,170 12,910 9,000

27,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Grade A Grade B All Grade

More take-up of larger spaces seen in H2 2022

Manufacturers and other tenants remained cost- conscious in 2022, with most tenant activity observed in mid-sized buildings offering relatively cheap rents for their grade or location Vacancies were filled in such buildings by companies looking to upgrade or expand, or those whose current premises were being redeveloped . The Grade B vacancy rate fell by 0.5 points q-o-q to 4.6% in Q2 2022, its first q-o-q decline since Q1 2020. Several companies also sought to downsize their premises during 2022 , with the supply-demand balance across the market as a whole continuing to loosen The All- Grade vacancy rate logged a y-o-y increase of 2 0 points to reach 5.8% in Q3 2022 . With approximately 20 ,000 tsubo of new supply projected for 2023, 30% above the annual average for the past few years, the vacancy rate is likely to continue to climb.

Rents are being lowered in many of the more expensive buildings, particularly those in the Grade A category, gradually leading to more interest for large Grade A vacancies which had previously attracted little attention. Grade A vacancies are likely to continue to be filled by relocation aimed at consolidations or upgrades With no new supply due to come on stream until after H1 2023, the Grade A vacancy rate is projected to slide by 1.1 points from Q3 2022’s level to 7.4% by Q2 2023. One new building is slated for completion in Q3 2023, however, and another in Q1 2024, which will provide a total of 18,000 tsubo of new supply. As these buildings are anticipated to commence operation at less than full occupancy, CBRE projects the Grade A vacancy rate to rise once again, reaching 8 5% by Q4 2024

50,000

45,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

40,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: CBRE, Q3 2022.

Other New Supply Grade A Vacancy Rate (RHS) Grade B Vacancy Rate (RHS) All Grade Vacancy Rate(RHS) Forecast

12%

Grade A New Supply

9%

8.2% 6.5% 4.9% 5.7%

6%

3%

15% 0

5.7% 5.7% 0%

Nagoya (cont.)

Loose supply-demand balance should cause rents to continue to fall, particularly in high-end buildings

Some 14,000 tsubo of new Grade B supply is slated for the period between 2023 and 2025 , suggesting that vacancies are likely to appear in less competitive buildings. However, demand is currently stable for Grade B offices, and should remain so for the foreseeable future . For this reason, CBRE forecasts the Grade B vacancy rate to reach 6.6% by Q4 2024, well below the Grade A rate

With no new supply planned for H2 2025 , vacancy rates should decline across all grades thereafter CBRE projects the Grade A vacancy rate as of Q4 2025 to be at 6.5%, 2.0 points lower than the current level, and the Grade B vacancy rate to be 5 .7%, 0.6 points higher than the current level (Figure 10).

The loosening of the supply -demand balance should lead to downward rent adjustments, particularly in high-end buildings By Q4 2025, Grade A achievable rents are projected to have fallen by 11.4% from their Q3 2022 levels to JPY 23,750 per tsubo. Grade B rents are expected to slip by a relatively smaller magnitude than Grade A, as many Grade B buildings are still seen as providing good value for money. CBRE projects Grade B rents to fall by 3.8% to JPY 13,750 per tsubo over the same period (Figure 11).

Figure 11: Nagoya assumed achievable rents

Forecast

28,000

26,000

24,000

22,000

20,000

18,000

16,000

14,000

12,000

JPY/tsubo Grade A Grade B All Grade

26,500 23,750 14,250 13,750 13,720 13,220 10,000

30,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: CBRE, Q3 2022.

Regional Cities

Volume of new supply to affect vacancy rates

Since the start of 2022 , demand has been on the rise in regional cities for reasons such as the establishment of new regional offices, expansion of existing offices, and improvements to office environments. While more cities are currently seeing increases in vacancy, such rises tend to be the result of new supply. The volume of take-up has actually increased compared to 2021.

As with the three major cities (Tokyo, Osaka, and Nagoya), however, tenants are becoming much more selective with respect to office specifications. Since the pandemic, higher vacancy has meant that tenants have more options at their disposal, while many companies have also recalibrated their office space needs As a result, buildings seen as too expensive for their location or grade have attracted little interest. In contrast, properties offering better value have quickly secured new tenants to fill vacancies. Amid continued economic uncertainty, a major recovery in relocation demand is unlikely. Future vacancy rates are therefore likely to be largely determined by the volume of new supply in each city.

Kanazawa, and Takamatsu have no new supply planned between 2023 and 2025 (Figure 12), while new supply in both Kyoto and Kobe is expected to amount to less than 2% of existing stock. The vacancy rates in these five cities are therefore expected to decline gently (Figure 13).

Figure 12: New supply as a ratio of total stock as of Q3 2022 (All Grade)

Source: CBRE, Q3 2022.

Regional Cities (cont.)

Sapporo, Sendai, and Saitama are each projected to see new supply equivalent to around 6% of existing stock between 2023 and 2025 (Figure 12). As of Q3 2022, Sapporo had the lowest vacancy rate of all 13 surveyed cities, at 1 0% Due to strong call center demand and relocation needs driven by redevelopment, the city has managed to maintain an extremely low vacancy rate, even at the height of the pandemic. Although new supply should push vacancy upward, the rate is projected to reach just 2 .0% by Q4 2025. Sendai’s new supply is almost entirely concentrated in the period from Q2 2023 to Q1 2024. Consequently, while the city’s vacancy rate is projected to rise to 4.0% in Q2 2024, it should fall back down to 2 2% by Q4 2025 With new supply scheduled for the period from Q2 2023 to Q2 2024, Saitama’s vacancy rate is forecast to rise by 2 .2 points from its Q3 2022 level to reach 4.4% by Q2 2024, after which it will decline to a projected 3.6% in Q4 2025 (Figure 13).

Yokohama and Fukuoka are each projected to see new supply exceeding 10% of their current stock over the next three years (Figure 12), meaning that their vacancy rates will rise more than those of other cities. With its new supply concentrated is 2023 and 2024, Yokohama can expect its vacancy rate to spike by 5 0 points from its Q3 2022 level to reach 8 0% by Q3 2024, before falling once more as far as 5 .9% by Q4 2025. With robust demand fueled by new office openings and upgrades, Fukuoka is the only market nationwide in which newly leased floor area has exceeded prepandemic levels for five straight quarters since Q3 2021. However, with new supply equivalent to 4 to 5% of existing stock slated to be added every year for the next three years, its vacancy rate is set to increase by 5 8 points from current levels to reach 9 0% by Q4 2025 (Figure 13)

Figure 13: All Grade vacancy rate forecast for Q3 2022 to Q4 2025

16%

14%

12%

10%

8%

6%

4%

2%

0%

Tokyo Osaka Nagoya Sapporo Sendai Saitama Yokohama Kanazawa Kyoto Kobe Hiroshima Takamatsu Fukuoka

Q3 2022 - Q4 2025 Q3 2022 Q4 2025

Source: CBRE, Q3 2022.

Regional Cities (cont.)

Rents fall in almost all cities

CBRE projects achievable rents for Q4 2025 to fall below Q3 2022 levels in nine of the 10 surveyed cities, with Takamatsu the only exception (Figure 14) In Takamatsu, the vacancy rate has been on the decline since Q3 2021, and is expected to maintain that trend, ensuring rents begin to climb from Q2 2024. With vacancy rates either rising or remaining stable in all other cities, rents are projected to continue their slow descent. However, in those cities for which vacancy rates are projected to begin to fall within the next three years, however, the pace of rent decreases should begin to slow Sapporo and Sendai already have low vacancy rates, which are expected to remain essentially unchanged through until Q3 2023. Rents in these two cities, therefore, will not begin their decline until 2024, and will fall by less than in other locations. With vacancy rates expected to spike more dramatically in Yokohama and Fukuoka, rents in these two cities there are projected to fall more significantly.

Figure 14: All Grade rent forecast for Q3 2022 to Q4 2025 (Index)

Q3 2022 = 100

100

95

90

85

Tokyo Osaka Nagoya Sapporo Sendai Saitama Yokohama Kanazawa Kyoto Kobe Hiroshima Takamatsu Fukuoka

Q3 2022 - Q4 2025 Q4 2025

Source: CBRE, Q3 2022.

The Ginza highstreet market will continue to be driven primarily by demand from luxury goods brands in 2023. While high street rents appear to have bottomed and maintaining the low levels, they should begin to rise once again in Q4 2022 and continue to slowly increase thereafter.

Retail macroeconomic indicators in 2022

Retail sales showing signs of recovery, but inflation suppresses consumer sentiment

With the exception of February, when restrictive measures to prevent the spread of COVID-19 were extended, monthly retail market indicators all showed y-o-y improvements over the course of 2022 . Compared to the figures immediately prior to the pandemic, however, some indicators, including nationwide department store sales, remain well down on these levels. On the other hand, signs of recovery have been seen in such areas as inbound tourist demand as a result of the easing of border restrictions.

Real GDP for Q2 2022 increased by 1.1% q-o-q, a higher growth compared to the -0 .5 % decline seen in Q1 2022 . Individual spending, which accounts for over half of Japan’s GDP, showed a 1.7% q-o-q increase, up 2 .7 points from the rise recorded in the previous quarter (Figure 1). In addition to increased consumption of services including accommodation and dining as a result of the populace being able to spend the May 2022 holidays without any restrictions on social or leisure activity, spending was also up for durables such as automobiles and semi-durables such as clothing.

Total retail sales volume for October increased by 4.3% y-o-y (Figure 2), marking the eighth straight months of positive y -o-y growth, reflecting the normalization of economic activities. Nationwide department store sales also showed a 11.4% y -o-y increase in October, the third consecutive month to see a double-digit percentage rise In particular, increase in the flow of people due to national travel support and other factors led to a success of local food fairs and other events. The market was also driven by the consistently robust luxury goods sector, as well as autumn-winter season clothing sales.

Figure 1: GDP & Private Consumption (Q-o-Q %)

Source: Japanese Cabinet Office, CBRE, December 2022

Figure 2: Retail Sales & Department Store Sales

Source: METI, Japan Department Stores Association, CBRE, November 2022

Retail macroeconomic indicators in 2022 (cont.)

Meanwhile, the consumer confidence index (households of two or more people ; seasonally adjusted) for November fell by 1.3 points from the previous month to 28.6 points, the third consecutive month in which the index has fallen (Figure 3), largely due to the influence of rising costs for daily necessities including electricity and food, as well as the concern for yet another rise in number of positive cases of COVID-19. All four categories making up the index (“overall livelihood”, “income growth”, “employment”, and “willingness to buy durable goods”) worsened, with “willingness to buy durable goods”, in particular, recording its historical low.

Inbound tourist demand showed signs of recovery due to the lifting of border restrictions. Foreign visitors reached 498,600 in October, approx 2 5 times higher than in the previous month (Figure 4)

By customer type, nationwide department stores saw a 335 .2 % y-o-y increase in inbound tourist spending during the month. From October 11, 2022, the Japanese government removed the cap on daily foreign entrant numbers and also lifted the restriction on personal travel. Such measures were also reflected in the sales figures. Further growth in inbound demand is expected, with the weak yen also a supporting factor

Figure 3: Consumer Confidence Index

Source: Japanese Cabinet Office, CBRE, December 2022.

Figure 4: Number of Inbound Tourists in Japan

Source: Japan National Tourism Organization (JNTO), CBRE, November 2022.

2022 retail market

Rents bottom out even as relatively large vacancies push up high

street vacancy

The impact of the COVID-19 pandemic on the retail rental market lessened in 2022 in comparison to previous years Many existing tenants recorded strong increases in sales as a result of the lack of restrictions on consumers for the May and summer holiday periods (Figure 5). In addition to a number of overseas brands opening their first Japanese stores, several moves aiming at expansion or upgrade were also noted . At the same time, however, some store closures caused by flagging sales have been recorded.

Figure 5: How did sales compare to the same period previous year?

As was the case throughout the previous year, demand for storefront space from luxury brands drove leasing activity in Ginza in 2022 . Several new developments in the high street area of Chuodori secured luxury goods brands as their tenants at landlords’ asking rents, which were roughly commensurate to prevailing market levels. One luxury goods brand even signed a contract for space in a property not due for completion for several years.

The Q3 2022 Ginza high street vacancy rate rose by 1 3 points q-o-q to 7 7% (Figure 6) While relocations necessitated by redevelopment filled some vacancies, the termination of a relatively large pop-up store contract led to the q-o-q rise . Vacancy was also recorded in a separate premise from which the tenant has withdrawn. While the space has been attracting number of candidate replacement tenants, the lease negotiations has been taking some time.

These are the result of CBRE’s quarterly survey. The survey targets retailers with street-level stores in major retail areas.

Source: CBRE, November 2022.

Figure 6: Ginza High Street Vacancy Rates

this quarter (Q3 2022), vacancy rate surveys will no longer be restricted to ground floor properties for which tenant demand is highest, but will instead cover all units for lease, including those on the ground floor. The data is retroactively corrected.

Source: CBRE, Q3 2022.

2022 retail market (cont.)

Ginza high street rents, which had risen steadily from 2017 to 2019, fell between 2020 and H1 2021 as a result of restrictive measures to contain the pandemic. After bottoming in Q3 2021, however, they have maintained the same level through to Q3 2022 (Figure 7) Rents have also reached the trough in areas dominated by domestic retailers, where weak demand previously forced rent levels downward.

Among the luxury brands displaying an interest in opening new stores in the Ginza area, some have shown a willingness to pay the high rents demanded by an extremely rare prime property located near the Ginza 4- chome intersection. For this reason, prime rents for Q3 2022 remained unchanged at JPY 400,000 per tsubo for the 28th consecutive quarter (Figure 8) . As was the case in the previous year, strong demand for store space continues to be seen from high-end wristwatch retailers and jewelry brands, all of which continue to enjoy strong sales

Figure 7: Ginza High Street Rents (JPY/tsubo)

255,000

250,000

245,000

240,000

235,000

230,000

260,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2021 2022

Due to the challengin conditions created by the pandemic, no high street rent tabulations were made in Q1 2020. This was a result of the fact that rent calculations were rendered problematic by the significant decrease in the number of new contracts signed during this period. Source: CBRE, Q3 2022.

Figure 8: Tokyo Prime Rents (Ginza) (JPY/tsubo)

Ginza 400,000 400,000 400,000 400,000 400,000

Source: CBRE, Q3 2022.

2023 retail demand

Luxury brands set to drive market; many retailers look to expand floor space or improve location

The Ginza rental market will continue to be primarily driven by demand from luxury brands in 2023. Recent quarters have seen several luxury brands, who submitted tenders for a new high street development but missed out on securing a lease, begin to search for new premises There are also luxury brands looking to relocate aiming at expansions and/or upgrades

Elsewhere, demand has been seen from jewelry and second-hand goods retailers, as well as from showrooms, all of which have thrived during the pandemic. These include retailers without a street- level presence in the Ginza area as well as others who had to vacate their current premises for redevelopment. Among the showroom operators looking for new space are several retailers selling luxury goods and one group looking to combine a showroom with a service store using its own products.

Many of the retailers, regardless of industry, hoping to find store space in the Ginza area are counting on a recovery in inbound tourist demand The significant loosening of border restrictions includes the lifting of the ban on individual travel, which had accounted for 76.6% of all foreign visitor numbers prior to the pandemic, while the weak yen has boosted foreign tourists’ spending power. This should act as a catalyst to spark demand over the course of 2023, especially for big-ticket items.

At the same time, the rising cost of interior store fit-outs is likely to lead to more cases in which landlords offer rent-free periods of up to several months in order to attract new tenants. Delays in procuring building supplies have already led some owners to adopt flexible approaches including delaying contract start dates. Elsewhere, comparatively large units are likely to be subdivided into smaller units to suit retailer needs

Rents to increase by 0.6% q-o-q in Q4 2022 and continue climbing slowly thereafter

After peaking in Q2 2016, Ginza high street rents fell for a short period before bottoming in Q3 2017 (Figure 9) . Rents then remained unchanged for some time, with small quarterly increases observed in both Q4 2018 and Q3 2019. The impact of the COVID-19 pandemic, however, meant that high street rents fell by 6.4% between the start of 2020 and Q3 2021. Since then, they have remained unchanged for four straight quarters through to Q3 2022, where they stood at JPY 241,500 per tsubo.

Rents now appear to have reached the trough, with a 0 .6% q -o-q increase projected for Q4 2022 set to bring rents up to JPY 243,000. Recent months have seen several luxury goods retailers sign new leases for multiple available properties in superior locations within the Ginza area. Contracted rents have either matched landlords’ asking rates (and market rates) or have even exceeded market levels as a result of competition between retailers

In high street areas further from the center of the district, where several vacancies are available, a number of new lease contracts have been signed, while others are still in the negotiation phase. Rents in some cases have exceeded current market levels and are matching pre-pandemic rents. Further lease signings for such properties are set to increase the upward pressure on rents, which is behind CBRE’s expectation that rents will reach JPY 243,000 per tsubo by Q4 2022

Figure 9: Ginza Hight Street Rent Forecast (JPY/tsubo) Q4 2021 To Q3 2023

Forecast

258,000

256,000

254,000

252,000

250,000

248,000

246,000

244,000

242,000

240,000

260,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2018 2019 2020 2021 2022 2023 2024

Source: CBRE, Q3 2022.

This increase in demand is underpinned by a robust appetite for big-ticket items among domestic consumers. This is evidenced by the fact that the “artwork, jewelry and precious metals” category in the nationwide department store sales figures for September 2022 recorded its 20th consecutive monthly y-o-y increase, extending its record streak Inbound tourist demand, which completely disappeared during the pandemic, is also expected to continue its recovery on the back of the lifting of restrictions on individual travel.

Underpinned by this recovery in inbound tourist demand, rents are projected to rise by 3.3% over the next two years in comparison to the levels seen in Q3 2022, which would still represent a 3.3% decline from the rents observed immediately prior to the pandemic in Q4 2019. Prime rents, which are defined as those for extremely exclusive properties near the Ginza 4- chome intersection, are anticipated to remain unchanged over the same period, as demand is consistently high from luxury brands for store space in rarely available real estate.

04Logistics

Unprecedented volumes of new supply is expected across Japan in 2023, due to the greater focus placed on logistics properties by developers. As a result, vacancy rates are expected to rise in all four metropolitan areas, despite continued robust tenant demand for logistics space.

Logistics Market - Summary

Figure 1: New Supply and Vacancy Rate

New Supply

New Large Multi-Tenant (LMT) logistics facility supply for Greater Tokyo is projected to reach a record-high 913,000 tsubo in 2023 A further 653,000 tsubo slated for 2024 will ensure that high levels of new supply will be maintained for the four-year period from 2021 to 2024. While tenant demand remains robust, net absorption will be unable to match the high volumes of new supply, leading to a projected vacancy rate of 8.1% by the end of 2023. This figure would exceed the most recent vacancy rate peak of 6.9% recorded in 2015 and would mark the highest vacancy rate since 2010’s figure of 11 7% The sharp increase in new LMT stock is a result of the increased focus placed on logistics properties by developers in response to the lack of supply seen between 2019 and 2021, when the pandemic led to a sharp spike in demand. Many developers also commenced the construction of facilities in regional cities during the same period. New supply records are likely to be broken in Greater Nagoya and Greater Fukuoka in 2023, and in Greater Osaka in 2024. While the vacancy rate will differ by area, all four metropolitan areas are projected to see the supplydemand balance loosen in comparison to 2022.

Projected changes to effective rents will reflect the level of vacancy in each region. Greater Tokyo effective rents are projected to drop by 0 .4% y-o-y in 2023, which would be the first y-o-y decline since 2016’s fall of 2 .2%. In Greater Nagoya, where effective rents have stayed relatively stable at a yearly average increase of 0 3% in the five years between 2018 and 2022, rents are projected to remain essentially unchanged. On the other hand, Greater Osaka and Greater Fukuoka are projected to see gradual rises in effective rents, as vacancy rates remain relatively low and supply in central locations remain insufficient. However, new supply in underdeveloped locations and concentration of supply in specific locations are being observed in all four major metropolitan areas. It is possible that rents may fall below CBRE’s estimates, should such properties take longer than expected to secure tenants.

1,200,000

900,000

600,000

300,000

tsubo

1,500,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Source: CBRE, Q3 2022.

20%

15%

10%

5.2 8.4 1.4 4.7

9.4

16.3 3.2 7.4 0%

Greater Tokyo Greater Osaka Greater Nagoya Greater Fukuoka

5%

25% 0

Figure 2: Effective Rent Index and Y-o-Y Change

Effective Rent Index (JPY/tsubo/month) Effective Rent Growth (Y-o-Y)

Source: CBRE, Q3 2022.

Vacancy rate set to increase in all four major metropolitan areas due to increased supply

Vacancy rate exceeds 5% in 2022 for the first time in four years amid significant new supply

Having already risen sharply from 0.5% at the end of 2020 to 2.3% by the end of 2021, the Greater Tokyo vacancy rate continued to edge upwards in 2022, reaching 5.2% in Q3 2022. This marked the first time since Q3 2018 that the Greater Tokyo vacancy rate had crossed the 5% threshold.

The major factor behind the rising vacancy rate is the large number of new LMT projects that emerged in response to the insufficient supply seen between 2019 and 2020, and due to logistics facilities being prioritized by investors and developers for the stability they provided during the pandemic. Many of these projects started to come on stream from H2 2021 onward, keeping new supply at elevated levels. As of Q3 2022, total cumulative new supply for 2022 stood at 551,000 tsubo, a 22% increase over the same period of the previous year . Net absorption over the same time frame was 385,000 tsubo, a rise of 10% y-o-y. Even after the spike in demand triggered by the pandemic dissipated, logistics operators and e -commerce businesses continued to display robust demand for logistics facilities. With new supply outstripping net absorption, however, the vacancy rate continues to rise.

This loosening of the supply-demand balance has led to the stagnation of leasing activity. As of Q3 2022 , the pre- leasing rate for properties due for completion within the next 12 months stood at just 18 2%, significantly down from the peak pre- leasing rate of 62 3% registered in Q3 2020 While occupancy rate at completion for new properties was 97% in 2020, the equivalent figure for the first three quarters of 2022 was 60% (Figure 3). The primary reason behind the loss of leasing momentum is the abundance of options tenants now enjoy. Unlike in 2019 or 2020 , when the supply-demand balance was extremely tight, there is no imperative for tenants to rush into signing leases Another contributing factor is that logistics operators do not currently need to proactively secure excess floor space, as consignors are becoming more cautious as a result of economic uncertainty caused by rising costs and other reasons.

200,000

150,000

Excess Supply Excess Demand

-50,000 2010 2011 2012

50,000 2017

100,000 2019 2020 2021

0 2014 2015

2013

2016

2018

2022

Greater Tokyo (cont.)

Tokyo) Vacancy rate projected to rise further in 2023, reaching 8.1% in Q4 2023

New supply for 2022 is projected to reach around 681,000 tsubo, an 8.8% increase from the previous year . 2023 is forecasted to see the completion of a record-high 913,000 tsubo of new floor space, while a further 653,000 tsubo of new supply is projected to come on stream in in 2024. This would mark four consecutive years of historically high levels of new supply (Figure 4) With household online spending in Japan continuing to rise even as the pandemic abates, demand for logistics facilities in the Greater Tokyo area should remain robust. The continued growth in net absorption, however, will not be sufficient to fill such abundant supply . A period of four successive years of vacancy rate increase due to excess supply would mark the first such occurrence of this phenomenon since CBRE began collecting LMT statistics in 2004

CBRE expects the Greater Tokyo vacancy rate to remain unchanged on a q-o-q basis at 5 .2 % in Q4 2022 . However, it should rise to another level from next year, reaching 8.1% by Q4 2023. Divided by area, the most significant spikes in vacancy are likely to be seen in the Route 16 and Ken -o-do areas, where nearly 90% of new supply for 2023 will be concentrated (Figure 5). With the period of plentiful new supply set to continue through to 2024, CBRE projects the Greater Tokyo vacancy rate to peak at 8.4% in Q4 2024. While potential delays in the delivery of construction materials and rising material costs may push back the completion dates of some projects and keep the vacancy rate slightly below CBRE’s projections, these factors should make little difference to the large supply pipeline that will be seen over the mid-term. As a result, tenants are likely to be much more selective when considering signing new leases, leading to starker differences in occupancy rate between individual properties based on such factors as location, specifications, and owners’ operational competence. Should properties such as the particularly large new facility planned for the Kanagawa area, where supply has already been plentiful and the vacancy rate is on the rise, take longer than predicted to lease their units, this could push the overall Greater Tokyo vacancy rate up above CBRE’s projections

Figure 4: Supply/ Demand Balance and Vacancy Rate (Greater

Source: CBRE, Q3 2022.

Figure 5:

and

Rate (Greater Tokyo, by Area)

Forecast

Source: CBRE, Q3 2022.

Greater Tokyo (cont.)

The abundance of new supply is also exerting an impact on the vacancy rate of existing properties.

While the vacancy rate for existing facilities (at least one year old) stood at a relatively low 1.7% as of Q3 2022 , it has been steadily climbing ever since Q1 2021 when it recorded an all-time low of 0.2%. Moreover, there are more cases observed recently where it has taken longer to fill vacancies for both existing and new properties. Given that many facilities completed in Q1 2022 still contain vacancies, the vacancy rate for existing facilities is likely to increase further when these facilities become more than one year old in Q2 2023.

Greater Tokyo effective rents projected to fall slightly due to increase in new supply in Ken-o-do

Greater Tokyo effective rents are projected to reach JPY 4,540 per tsubo in Q4 2022, which would represent a 1.6% y-o-y increase (Figure 6). This increase is largely due to the fact that the majority of 2022’s new facilities have been concentrated in comparatively high-rent areas. By Q4 2023, effective rents are expected to slip by 0 4% y-o-y to JPY 4,520 per tsubo, as a relatively large proportion of new supply in 2023 is slated to be concentrated in the lower-rent Ken-o-do area.

CBRE projects effective rents to fall by a further 0.7% y-o-y to JPY 4,490 by Q4 2024.

While abundant new supply should prevent rents from rising across Greater Tokyo as a whole, CBRE does not anticipate any significant decline in rents. That said, some disparities are expected to emerge between different areas With available properties in the Tokyo Bay area continuing to be limited, rents are expected to continue to rise in this location, while they should remain relatively stable in the Gaikando and Route 16 areas. Any sub-areas featuring significant new supply or located adjacent to those areas, however, or specific properties struggling to find tenants, may see effective rents decline. In the Ken-o-do area, vacancy rates are on the rise due to new construction in the outer part of the area, raising the probability that rents will fall

Figure 6: Effective Rent Index (Greater Tokyo, by Area)

JPY/tsubo/month

8,000

7,000

6,000

5,000

4,000

9,000 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024

4,540 4,490

7,570 7,960 5,170 5,200 4,520 4,510 3,610 3,500 3,000

Greater Tokyo Tokyo Bay Area Tokyo Bay Area Gaikando Area Route 16 Area Ken-O-do Area

Source: CBRE, Q3 2022.

Osaka

Abundant supply to absorb demand; rents to rise but performance will diverge by area

The vacancy rate for Greater Osaka stood at 1.7% as of Q3 2022, with a similarly low rate of between 1% and 2% expected to be maintained in Q4 2022 The major reason for low vacancy is the paucity of new supply, with 2022 witnessing the addition of only 58,000 tsubo, well below the yearly average over the previous five years of 203,000 tsubo. However, 2023 is slated to see some 226,000 tsubo of new supply, with 2024 set to see an even more significant 315 ,000 tsubo. While a decent amount of new stock can be expected to be taken up, particularly as a result of pent-up activity following pandemic- related restrictions in 2022 , the vacancy rate is still projected to climb as high as 4.7% by Q4 2024. With a substantial portion of new supply planned for relatively undeveloped peripheral areas in Shiga, Nara, and southern Osaka Prefectures, tenants are likely to be wary about committing to such emerging regions. That said, some units have already secured tenants, with demand expected to further increase gradually

CBRE projects effective rents to increase by 0 .7% y-o-y in both 2023 and 2024. Although new facilities in peripheral areas will suppress average rents, the extreme lack of vacant space in central areas should ensure that rents continue to rise gradually. Several properties equipped with rampways are scheduled for completion in central Osaka, with the high rents typically commanded by such facilities also set to influence overall rental performance in the coming years.

Figure 7: Supply/ Demand Balance and Vacancy Rate (Greater Osaka)

tsubo

Source: CBRE, Q3 2022.

24%

20%

16%

12%

8%

1.4% 4.7% 0%

28% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 New Supply Net Absorption Vacancy Rate

4%

Figure 8: Supply/ Demand Balance and Vacancy Rate (Greater Nagoya) Supply

chain reforms boost logistics demand

but may fail to fully absorb expanding supply

While the Greater Nagoya vacancy rate stood at 11.0% in Q3 2022 , well above that of the other major metropolitan areas, net absorption for 2022 is projected to exceed 130 ,000 tsubo Logistics demand in the area is being driven by manufacturers’ recalibrations of their intermediate material storage needs, as a means of overcoming the supply chain challenges caused by the pandemic. With new supply reaching 171,000 tsubo in 2022 , and projected to record another 190 ,000 tsubo in 2023, CBRE projects the vacancy rate will rise as high as 16.4% by Q4 2023 and will maintain those high levels through to the end of 2024 However, effective rents are expected to remain essentially unchanged, with a 0.3% rise projected over the next two years. The lack of high-quality properties throughout Greater Nagoya is leading to this phenomenon of stable rents amidst rising vacancy rates. While rents may slip somewhat in areas with abundant supply, these declines should be offset by high rents being maintained in central areas with few available spaces.

Greater Fukuoka

Rents to continue to rise but pace should slow

Between Q2 2019 and Q2 2022, the Greater Fukuoka area maintained a vacancy rate of 0 0%, with all seven new facilities completed during that period coming on stream fully occupied. While significant new supply is slated to be completed for the period between 2022 and 2024, strong net absorption is anticipated. With a series of facilities due for completion in newly-developed areas, however, it is likely that vacancies will take longer to fill than previously. CBRE projects the vacancy rate to rise to 7 4% by Q4 2024 Effective rents are expected to show the most significant increase among the major metropolitan areas, at +1.8% y-o-y projected for 2023 and a further +1.2% in 2024. While vacancies should appear over the next few years, the overall paucity of stock in the area means that these new developments will not represent an excess of supply. Nevertheless, the pace of effective rent rises is likely to slow in comparison to the +4.0% y-o-y projected for 2022.

160,000

120,000

80,000

40,000

tsubo

200,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 New Supply Net Absorption Vacancy Rate

Source: CBRE, Q3 2022.

9.4%

16%

12%

8%

4%

16.3% 0%

20% 0

05

Investment

Commercial real estate transaction volume in Japan for 2022 is expected to be slightly lower than the previous year’s level. Nevertheless, expected yields have continued to decline, indicating that investor appetite remains stable. Some investors have become more selective amid overseas interest rate hikes and concerns over a possible recession in US and Europe. However, the BoJ appears unlikely to tighten its monetary policy in the short term, and appetite for Japan real estate looks set to remain robust in 2023.

Investment market in 2022

Transaction volume for first three quarters of 2022 falls by 13% y-o-y

Domestic investment shrinks while foreign investment surged

Cumulative transaction volume for 2022 for the first three quarters in 2022 (transactions of JPY 1 billion or more, Figure 1) fell by 13% y-o-y to JPY 2,346 billion While foreign investment surged by 54% y-o-y, transaction volume by J-REITs and other domestic investors fell by 46% and 22%, respectively.

There are three major factors behind the decline in investment volume. The first is weaker J-REIT share prices, while the second is a lack of properties available for sale. With financing conditions strongly positive, potential sellers chose to refinance if they saw that they would not get their intended price . The third and final factor is that differences in asking prices and what potential investors were willing to pay resulted in longer negotiation periods and delayed contract signings.

Despite the drop in transaction volume, investor appetite remains robust. The results of CBRE’s Tankan Survey, conducted quarterly among domestic investors (Tokyo Grade A buildings, Figure 2), show that while the diffusion index (DI) for “stance on investment and loans” worsened significantly in 2020 as a result of the pandemic, it has been improving steadily ever since While the DI worsened again in Q3 2022 , this was the result of fewer respondents indicating that they had accelerated investment and more respondents indicating that they had maintained the status quo. It appears that an increasing number of investors adopted a wait- and-see approach over concerns of a potential tightening of Japan’s fiscal policy with the expected transition to a new Governor of the BoJ The largest transaction recorded in the first nine months of 2022 was GIC’s purchase of a portfolio of hotels and golf courses previously owned by Seibu Holdings for JPY 147.1 billion. Seven of the top ten transactions by volume were by foreign investors, including the purchase of an office block for over JPY 100 billion.

Figure

1:

Transaction volume by investor type

JPY bn

4,000

3,000

2,000

1,000

0

5,000 2017 2018 2019 2020 2021 Q1- Q3 2021 Q1- Q3 2022

Domestic (J-REITs) Domestic (Others) Overseas

Transactions of at least JPY 1 billion, excluding acquisitions by J-REITs at IPO. Source: Real Capital Analytics, CBRE, Q3 2022.

Figure 2: “Stance on investment and loans“ for Tokyo Grade A office buildings

CBRE Tankan Survey (DI)

Current quarter assessment Six months outlook DI subtracts the ratio (%) of respondents that expected a "contraction" from the ratio (%) of respondents that expected an “expansion.” Source: CBRE, Q3 2022.

Investment market in 2022 (cont.)

Foreign investors complete several major acquisitions

Total cumulative transaction volume data divided by asset type* (comparison of first three quarters in 2022 and 2022, Figure 3) reveals that only the residential sector showed an y-o-y increase (up 42 % to JPY 435 .0 billion), which was up 7% y-o-y. Foreign investors are responsible for 68% of this cumulative transaction volume, with the number of transactions of above JPY 10 billion, primarily for portfolios, comfortably surpassing last year’s figures. The largest y-o-y decrease was in the logistics sector (down 55% to JPY 211.0 billion), followed by the office sector (down 24% to JPY 999.0 billion). The fall in logistics investment volume was due to the 63% decrease in acquisitions by J-REITs. Amid a shortage of available properties, transaction volume by foreign investors was also down 68% While foreign investment in offices was unchanged from the previous year, transaction volume by domestic investors including JREITs declined . It should be noted, however, that one deal currently being processed by a domestic investor and expected to be closed in Q4 2022 would be one of the largest ever in Japan. Should this transaction be completed, office transaction volume for 2022 would record a y-o-y increase for the third consecutive year

Fall in investment by J-REITs largely a result of sluggish share prices

Poor performance by J-REIT shares has meant that capital raised through public equity offerings so far in 2022 is 52% below the previous year, which has led to a drop in J-REIT transaction volume. Total cumulative transaction volume through the first three quarters of 2022 stood at JPY 529 .0 billion. Should the final figure for the year fail to exceed JPY 1 trillion, it would represent the lowest mark since 2012. The largest drop in share prices for the year to end of September has been seen in the logistics sector (down 18 5%, Figure 4) Relatively low dividend yields (as a result of share price outperformance in the previous years) appear to have deterred investors on the back of concerns for potential monetary tightening. As a result, total cumulative investment volume by JREITs in logistics facilities is currently down by over 60% from the previous year.

Figure 3: Transaction volume by sector

1,500

1,250

1,000

750

500

250

JPY bn

-24% 42% 0% -55% -15% -61% 0

Office Residential Retail Industrial Hotel Others

Q1- Q3 2021 Q1- Q3 2022

Transactions of at least JPY 1 billion, excluding acquisitions by J-REITs at IPO. Source: Real Capital Analytics, CBRE, Q3 2022.

Figure 4: J-REIT stock price by asset type -40% -30% -20% -10% 0% 10% 20% 30%

Change 2020 2021 Q1-Q3 2022

TSE REIT Office Retail Residential Industrial Hospitality Diversified

Source: Datastream, CBRE, October 2022.

Investment market in 2023

Heightened uncertainty set to drive more capital into Japanese real estate

Despite total investment volume for the first three quarters of 2022 falling by over 10% y-o-y, investors’ expected yields (page 41, Figure 9) continued to drop, indicating that many buyers still have a robust investment appetite. With several large deals in the pipeline for Q4 2022 , total transaction volume for the calendar year is expected to be only 3% below that of 2021 (Figure 5)

Interest rate hikes in overseas markets and worries over a possible recession in US and Europe have caused some foreign investors to adopt a more cautious approach since around Q3 2022 . Despite these concerns, the Japanese real estate investment market is set to remain active in 2023. This is because of several factors. Firstly, the Japanese economy is projected to continue on its slow path to recovery, driven by both consumer spending and corporate capital investment Secondly, with loose monetary policy likely to be maintained in Japan for the time being, cap rate spreads for real estate investment can be expected to remain higher than in most other countries (Figure 6) . Finally, real estate funds have 30% more money to invest in Asia Pacific than they did prior to the pandemic in 2019. Armed with ample capital, they remain keen to invest, with Japan seen as a market of significant interest

CBRE forecasts investment volume in 2023 to see a few percent drop compared to 2022. With a few foreign investors adopting a more selective attitude, domestic investors have recently been seen to prevail in bidding for relatively large projects, and are likely to continue to be the prime drivers in 2023. That said, significant new supply is slated mainly in the Greater Tokyo area for both the office and logistics sectors. With fewer properties from which cash flow growth can be anticipated, investors may become more selective overall Also, while 2022 saw the second largest volume of large-scale deals of JPY100bn or higher, 2023 is likely to see fewer such transactions given the total amount of speculated deals in the pipeline so far.

Figure 5: Real estate investment volume

JPY bn

4,000

20%

3,000

0%

2,000

5,000 2015 2016 2017 2018 2019 2020 2021 2022 2023

Transaction volume (LHS) Y-o-Y (RHS)

Transactions of at least JPY 1 billion, excluding acquisitions by J-REITs at IPO. Source: Real Capital Analytics, CBRE, November 2022.

Figure 6: Prime Office Yield relative to local 10-year Government Bond Rate

5%

4%

3%

2%

1%

0%

-1%

-2%

-20%

-40%

40% 1,000

Tokyo Shanghai Sydney Singapore Seoul Hong Kong

Spread Prime office cap rate 10-y Govt bond yield

Source: Datastream, CBRE, Q3 2022

Investment strategy in 2023

More selective approach essential as the rental market weakens

While prime properties offering stable cash flow will remain popular among investors, few such assets will be available for investment. Furthermore, the number of properties offering cash flow growth is likely to be less than in 2022 . Investment decisions will therefore need to be based on more than just a consideration of sector and/or grade, and should require considered analysis on a case-by-case basis. CBRE’s projections for Tokyo prime asset transactional yields for Q4 2023 are increases of 5 bps y-o-y for both offices and logistics, and a decrease of 5 bps y-o-y for retail (Figure 7).

Significant new supply over the next three years will push up the Tokyo office market vacancy rate, and lead to further decline in market rents Less competitive properties may well see their transactional yields increase . Nevertheless, investor appetite for office properties should remain steady in 2023. With more liquidity than other sectors, the office sector offers greater opportunities for core and value- added investment. In this environment, investors will be looking to invest in properties which will meet the occupier needs for upgrading or consolidation, which is seen to be the prime driver of the office leasing market Analysis of factors such as locational advantages, building age, and available amenities will become increasingly important in the process of property selection.

Logistics facilities are popular among investors as defensive assets which provide stable cash flow even in times of economic uncertainty. Nonetheless, Greater Tokyo logistics market rents are forecast to fall by 0 .4% y-o-y in 2023 on the back of significant new supply. As such, a more selective approach with respect to location and building specifications will become increasingly important in this asset type as well. This more selective approach may push up transactional yields from their current record low levels.

Figure 7: Tokyo prime yields outlook

5%

4%

3%

2%

6% Office (GradeA) Logistics (Multi-tenant, Tokyo Bay Area) Retail (Ginza, High-street) Q1 2007 - Q3 2022 Q4 2022 E Q4 2023 E

Source: CBRE, November 2022.

Figure 8: Rental outlook by major asset type in Tokyo -7% -6% -5% -4% -3% -2% -1% 0% 1% 2%

Chg y-o-y

Office (GradeA) Logistics (Multi-tenant, Greater Tokyo) Retail (Ginza, Hight-street) 2021 2022 E 2023 E

Source: CBRE, Q3 2022

Investment in residential assets set to remain robust in 2023; retail and hotels to garner more attention on back of recovering tourist demand

The residential sector, which remains popular among investors owing to its stable cash flow, has seen expected yields fall by between 30 and 38 bps since 2020, behind only to the logistics sector whose expected yields fell 45 bps (Figure 9) In central Tokyo, a major transaction of one building this year recorded a transactional yield of below 3%. While investor appetite appears set to remain strong in 2023, vendors are now looking to sell at higher price points, in some cases above those potential buyers are willing to consider . On this backdrop, further transactional yield compression may be limited.

Amid high expectations for a rebound in inbound demand following the lifting of border restrictions in October 2022, the retail and hotel sectors are attracting stronger investor interest Properties in some retail districts have now either matched pre-pandemic expected yields in Q3 2022 (Ginza in Tokyo, Midosuji in Osaka, Tenjin-Nishi in Fukuoka) or even fallen below those levels (Omotesando in Tokyo, Sakae in Nagoya). Turning to the hotel sector, total cumulative Japanese guest numbers as of October 2022 had recovered to 88% of the figure from the same month in 2019. With the gradual increase in foreign guest numbers, further improvements in hotel cash flow can be anticipated. However, some cities have seen new hotels built even during the pandemic, following plans initially put in place several years previously. Investor interest may therefore differ depending on area and hotel type.

Figure 9: Tokyo expected NOI yields

8%

7%

6%

5%

4%

3%

Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018 Q2 2019 Q2 2020 Q2 2021 Q2 2022

Office (Otemachi, Tokyo) Retail (Ginza, Tokyo)

Industrial (Tokyo bay area) Hotel (Tokyo 5 wards, management contract)

Studio-type apartment (Tokyo 5 wards) Multi-room apartments (Tokyo South, Tokyo East)

Note: Average figure of the median of lowest/highest yield each.

Source: CBRE, Q3 2022

MEMO:

MEMO:

Contacts

CBRE Japan Research

Hiroshi Okubo

Managing Director

Head of Research hiroshi.okubo@cbre.com

Yuji Iwama Director Office Team Leader / Data center yuji.iwama@cbre.com

Kumiko Ninomiya Analyst Retail Team kumiko.ninomiya@cbre.com

Yoshitaka Igarashi Director Office Team Leader / Hotel yoshitaka.igarashi@cbre.com

Kazuko Takahashi Senior Director Industrial Team Leader kazuko.takahashi@cbre.com

Sayuri Kaneko Analyst Office Team sayuri.kaneko@cbre.com

Chinatsu Hani Director Industrial Team chinatsu.hani@cbre.com

Kaoru Kurisu Director Retail Team Leader kaoru.kurisu@cbre.com

Asuka Honda Director Investment Team Leader asuka.honda@cbre.com

Global and Regional Research

Richard Barkham Ph.D. Global Chief Economist & Global Head of Research richard.barkham@cbre.com

Henry Chin, Ph.D. Global Head of Investor Thought Leadership Head of Research, Asia Pacific Research henry.chin@cbre.com.hk

© Copyright 2022 All rights reserved This report has been prepared in good faith, based on CBRE’s current anecdotal and evidence based views of the commercial real estate market Although CBRE believes its views reflect market conditions on the date of this presentation, they are subject to significant uncertainties and contingencies, many of which are beyond CBRE’s control. In addition, many of CBRE’s views are opinion and/or projections based on CBRE’s subjective analyses of current market circumstances Other firms may have different opinions, projections and analyses, and actual market conditions in the future may cause CBRE’s current views to later be incorrect CBRE has no obligation to update its views herein if its opinions, projections, analyses or market circumstances later change.

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