【CBRE】Japan Real Estate Market Outlook 2021 by CBRE-JAPAN-MARCOMMS-ARCHV

CBRE RESEARCH | ASIA PACIFIC

RESTART RECOVERY AND BEYOND

cbre.co.jp

A S I A PA C I F I C R E A L E S TAT E MARKET OUTLOOK | JAPAN

INTRODUCTION / FOREWORD

RESTART RECOVERY AND BEYOND

In 2020, the Japanese government introduced a range of policies suspending a broad range of economic activity in the hope of controlling the spread of COVID-19. As these restrictions took hold and began to affect people’s everyday lives and behaviour, the impact on the real estate market gradually became apparent. The drop in business activity caused office rents to decline; a sharp decline in inbound tourists led to an abrupt downturn in retail leasing demand; the rapid growth of e-commerce spurred increasing requirements for logistics facilities. Following a resurgence in COVID-19 infections in December 2020, the Japanese government is once again likely to adopt a policy of restricting economic activity in the early months of 2021 to contain the spread of the virus. While this bodes ill for the domestic economic outlook (albeit to a lesser extent compared to the first declaration of state of emergency in 2020), the commencement of vaccination programs in several countries around the world has raised hopes for the gradual eradication of the pandemic, leading to the eventual normalisation of the global economy. CBRE expects the Japan real estate market to either bottom-out and/or commence a recovery in 2021, although the pace and timing of the rebound may vary across different sectors. However, all sectors are likely to feel the long-term impacts of short-term disruptions caused by measures to contain the pandemic. In the office sector, the rapid adoption of remote working is encouraging many companies to reexamine the role of the office, prompting them to consider introducing a range of new workplace formats. In the retail sector, both landlords and tenants are reviewing the design, positioning and function of brick-and-mortar stores in the digital age. In the logistics sector, accelerating e-commerce growth and a shortage of labour are further boosting demand for large, state-of-the-art facilities. This report by CBRE casts a look back at 2020 and explains how last year’s unprecedented events may influence Japan’s commercial real estate market in 2021 and beyond.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

CONTENTS

Economy

Logistics

GDP is expected to contract by 5.7% for the full year 2020, but is expected in 2021. Although there is a risk of another contraction due to the resurgence of infections, the economy is expected to start recovering gradually at least from Q1 2021 onwards, given the expected supply of vaccines. However, recovery in real estate leasing market may take until the end of 2021 to bottom out.

New supply will continue to be high in the Greater Tokyo area, Greater Osaka area, and the Greater Nagoya area. However, rise in vacancy rate is expected to be limited, as the accelerating growth of EC, together with the need for automation to solve operational issues such as labor shortages, are likely to continue to drive demand.

Office

Investment

Vacancy rates will be on an upward trend nationwide and rents are expected to fall in most of the cities, including Tokyo, Nagoya, and Osaka, through 2023. However, in some regional cities where new supply is limited, rents are expected to bottom out at a relatively early stage.

As low interest rate policies are expected to continue worldwide, real estate investments with relatively high yields are expected to continue to attract money. The easing of restrictions on travel for business purposes will further encourage foreign investors to resume their activities in Japan. In addition, an increasing number of business companies are considering asset sales from around the middle of 2020, and these deals will start to come to fruition in 2021. In addition, investments with an eye on post-Corona growth potential are likely to begin.

16 Retail Rents, which began to decline in 2020, are expected to fall further in 2021. The need for retailers to open new stores is expected to weaken for the time being, as it is likely to take time for inbound demand to recover and visitors to the city have not returned to pre-Corona disaster levels due to selfrestraint in going out and the spread of telework.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

ECONOMY

RESTART

ECONOMY

115

Industrial production Retail sales

110 105 100 95 90 85 80

2020.10

2020.09

2020.08

2020.07

2020.03 2020.04

2020.06

2020.02 2020.03

2020.05

2020.01 2020.02

2020.04

2019.12

2019.11

2019.10

2019.09

2019.08

2019.07

2019.06

2019.05

2019.04

2019.03

2019.02

2020.01

The Japanese government implemented stimulus packages in April and May, with an aggregate project size of JPY 234 trillion, equivalent to 40% of GDP. In August, authorities also launched the “Go To Campaign,” with the objective of stimulating domestic tourism and consumption. These policies appear to have had some positive impact on the economy, with consumer-spending indicators on the rise once again since August. In particular, October retail sales was the highest since June 2019, excluding the Sept 2019 figure which was boosted by front-loading demand ahead of the consumption tax hike. The new Suga cabinet, formed in September following the resignation of Shinzo Abe as prime minister, has also put together additional economic recovery measures, with an estimated project size of JPY 73.6 trillion. The package consists of three major pillars, including the prevention of infection; the restructuring of the pandemic-era economy; and disaster management and reduction measures.

FIGURE 1: INDUSTRIAL PRODUCTION AND RETAIL SALES (INDEXED)

2019.01

Japanese economy contracted following the onset of the pandemic and the declaration of a nationwide state of emergency. Major economic indices such as industrial production and retail sales declined sharply from February through to April or May. Real GDP fell by 28.8% q-o-q (annualized) in Q2 2020, the largest decline since current records began in 1955. After the state of emergency was lifted at the end of May, the economy has begun to recover. Driven by exports and private consumption, GDP surged by 21.4% q-o-q in Q3. Nevertheless, the economy remains approximately 6% smaller than it was in Q3 2019, i.e. prior to the pandemic and the consumption tax rate hike. Meanwhile, on the back number infection rising again since October, the government has again declared the state of emergency on 7 th Jan. As of this writing on 12 th Jan., the duration is until 8 th Feb, and the implemented areas are the four prefectures in Greater Tokyo area. As such, the economy may again contract in Q1 2021. The duration of the declaration may be extended and/or it may be implemented in other areas such as Osaka.

Source: METI, CBRE, November 2020.

FIGURE 2: NIKKEI STOCK AVERAGE 30,000 JPY

25,000

20,000

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

2020.12

2020.11

2020.10

2020.09

2020.08

2020.07

2020.06

2020.05

2019.12

2019.11

2019.10

2019.09

2019.08

2019.07

2019.06

2019.05

2019.04

2019.03

2019.02

The stock market fell sharply from the end of February 2020, but has been on a recovery trend since April, and strengthened significantly in November, boosted by progress in vaccine development (FIGURE 3).

2019.01

15,000

Source: Datastream, CBRE, December 2020.

ECONOMY

CBRE forecasts that GDP contracted by 5.7% in 2020 and recover by 2.6% in 2021 (FIGURE 3, forecast as of end-2020). While a resurgence in COVID-19 infections over the winter poses a risk of another contraction, the anticipated supply of vaccine is fueling expectations that the economy should commence a slow recovery from Q1 2021, if not sooner. However, the rebound in real estate occupier markets is likely to lag that of the overall economy. The reason for this is that in addition to the economic stagnation, the pandemic has also served as a catalyst to enhance changes in the role of real estate. This trend is most evident in the office sector, which has seen the widespread adoption of remote working, underpinned by the progress in communication technologies. As a result, many companies are now reviewing their real estate strategy, in consideration of potential changes in how their employees might work most efficiently. As such strategies are likely to be formulated by the start of the new fiscal year in April, office leasing activity, be it contraction or expansion, is not likely to materialise in earnest until mid-2021. In the high street retail segment, a recovery in domestic consumption alone is unlikely to be sufficient to drive its recovery. Only when inbound tourist demand has rebounded will the market be able to recover in earnest. As for real estate investment, the volume itself is unlikely to be unaffected by the pandemic. We estimate the total volume in 2020 to be around the same level as in 2019, and the volume for 2021 to be about the same as in 2020 (FIGURE 4). Since loose monetary policy is likely to continue, interest rates should remain low for longer (FIGURE 5). This would provide a low cost of capital while also ensuring real estate continues to attract investors through offering higher yields than will be available elsewhere. CBRE’s latest survey indicates that investors’ appetite remains robust, and some may also start to focus more on post-COVID cash flow growth potential.

FIGURE 3: Real GDP forecast 4%

+1.3

+3.1

+2.6 +0.6

+1.2

+0.3

0 -2 -4 -6

Forecast

-5.7

-8

2013-2017 2018 2019 Average Source: Cabinet Office, CBRE, November 2020.

2020

2021

2022

2023-2027 Average

FIGURE 4: Real estate investment volume Q1

6,000 JPY bn

Forecast

5,000 4,000 3,000 2,000 1,000 0 2012

2013

2014

2015

2016

2017

2018

2019

2020E

2021F

Transactions of at least JPY 1bn, excluding acquisitions by J-REITs at IPO. Source: CBRE, November 2020.

FIGURE 5: 10-year Japanese government bond yield 2.0 ％ 1.6 1.2 0.8 0.4 0.0 -0.4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Datastream, CBRE, November 2020. ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

OFFICE

REASSESS

O F F I C E | T H E R O L E O F T H E O F F I C E I N FA C I L I TAT I N G C O M M U N I C AT I O N

THE ROLE OF THE OFFICE IN FACILITATING COMMUNICATION (FROM THE RESULTS OF OCCUPIER SURVEY* 1, CONDUCTED IN OCTOBER 2020) The COVID-19 pandemic has served as a catalyst for major changes to office working styles and locations in Japan. CBRE’s Occupier Survey, conducted in October 2020, found that approximately 60% of respondents said that they have introduced remote working in response to the pandemic (FIGURE 1). Including those who replied that they had already introduced remote working prior to the pandemic, approximately 90% of respondents have now implemented some form of remote working. There was no great discrepancy between companies based in Tokyo 23 wards and those in other areas of Tokyo or regional cities. There was, however, a significant difference between Tokyo and other regional cities in terms of actual office occupancy. FIGURE 2 shows the survey result indicating the maximum occupancy rates of all desks in their offices, as of October 2020. While 28% of respondents from Tokyo 23 wards answered that the maximum occupancy rate was in excess of 75%, the equivalent figure in regional cities was a much higher 42%. This suggests that, in regional cities, while remote working may have been introduced, high percentage of workers are still commuting to office. This further implies that re-evaluation of office floorspace triggered by the introduction of remote working practices is likely to be much less prevalent in regional areas than in Tokyo 23 wards. As such, CBRE projects that, in comparison to Tokyo 23 wards, rise in vacancy rates in regional cities are likely to be more moderate.

In future, offices are likely to be required to take on a more prominent role as facilitators of communication than they have in the past. The volume and quality of communication are considered to impact efficiency and productivity of work. This renewed focus on the importance of the office’s role in communication may even lead to the possibility of increased office occupancy rates with the return of workers to the office in both Tokyo and in regional cities.

FIGURE 1: THE INTRODUCTION OF REMOTE WORKING 0%

Scheduled to be published in February 2021

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

40%

60%

80%

100% 3% 2%

Tokyo 23 wards(n=141)

30%

60%

2% Other areas of Tokyo and regional cities (n=52)

While remote working has been widely introduced since the pandemic, number of issues are still seen in its practical implementation. The most commonly raised issues in the survey were “communication among employees” and “management of team and subordinates”, both of which were identified by over 70% of respondents (FIGURE 3).

20%

Source: CBRE, November 2020.

29%

58%

6% 6%

Introduced prior to advent of COVID-19 Introduced following spread of COVID-19 Plans in place for introduction in future No plans in place for introduction Under consideration Don’t know

O F F I C E | T H E R O L E O F T H E O F F I C E I N FA C I L I TAT I N G C O M M U N I C AT I O N

FIGURE 3: CHALLENGES TO IMPLEMENTING REMOTE WORKING (NATIONWIDE, TOP FIVE ITEMS)

FIGURE 2: SEAT OCCUPANCY RATE 0%

20%

40%

60%

80%

100%

50%

100%

Communication among employees Tokyo 23 wards (n=148)

16%

24%

25%

28%

Management of teams and subordinates Digital stamping technology

Other areas of Tokyo and regional cities (n=53)

Source: CBRE, November 2020.

8% 15%

19%

42%

17%

Less than 25% of total seats More than 25% and less than 50% of total seats More than 50% and less than 75% of total seats More than 75% of total seats Don’t know

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

79% 70% 52%

Manegament of employee health

47%

Communication environment

46% (n=170)

Source: CBRE, November 2020.

O F F I C E | TO K Y O

TOKYO: VACANCY RATES SET TO RISE FROM 2021, RENTAL ADJUSTMENTS TO CONTINUE 2020 began with the Tokyo All-Grade vacancy rate standing at an all-time low of 0.6%. Continuing the trend from 2019, leasing demand was robust, driven by IT companies as well as major manufacturers. From March onward, however, the impact of measures to contain the spread of COVID-19 gradually began to be felt in the office market, with a number of relocations or new openings placed on hold, delayed, or cancelled.

FIGURE 4: TOKYO NEW SUPPLY AND VACANCY RATE Grade A New Supply Grade A Vacancy Rate (RHS) Grade A Minus Vacancy Rate (RHS)

tsubo

New Supply - other than Grade A Grade B Vacancy Rate (RHS) All Grade Vacancy Rate (RHS)

300,000

10%

Forecast

250,000

200,000 6% 150,000 4% 100,000 2%

50,000

0 2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

0% 2007

The pace of take-up began to slow down and the volume of cancellations began to increase from Q2 2020. While an increase in vacancy rate is anticipated over the coming quarters, the vacancy rate in Q3 2020 stood at just 0.9%, although this refers only to those units available for immediate occupancy. The availability rate, a metric which also includes units where the occupiers have submitted the termination notice, as well as available units in buildings which are planned for completion within the next year, stood at 4.4% as of Q3 2020, up 2.2 pts from Q1. Recent months have seen more downsizing of office space for the purposes of cost cutting as well as due to changes in work styles, particularly among small-to-medium-sized buildings. Also, 2020 saw the completion of 170,000 tsubo of Grade A offices. Although these buildings themselves came on stream with a high occupancy rate of more than 90%, take-up of secondary vacancies in existing buildings has been slow. This has also been a contributing factor to the increase in available units.

Source: CBRE, November 2020.（Vacancy rates are as of Q4 of each year）

Pre-leasing rate for new buildings due for completion in 2021 and beyond has also begun to slow somewhat. However, volume of new supply planned for 2021 and 2022, at 100,000 tsubo and 120,000 tsubo, respectively, are below the average between 2000 and 2019 (180,000 tsubo). As these are well below the recent yearly average of 180,000 tsubo, the impact on the supplydemand balance should be limited. The pre-lease rate for new Grade A supply for 2021 is estimated to be at around 70%, as of November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

O F F I C E | TO K Y O

The average supply of Grade A-minus and Grade B offices over the next three years is expected to be below the past annual average. Office buildings in non-core areas whose rent levels are relatively low are expected to attract a certain level of demand, either from companies looking to cut costs, or as satellite offices as part of office decentralisation plans implemented as a result of the pandemic. Due to these factors, rise in vacancy rates for Grade A-minus and Grade B offices are likely to be relatively moderate compared to Grade A, with the former rising by 1.5 points to 3.0% by Q4 2023, and the latter rising by 1.9-point to 3.2% over the same period. In terms of rents, Grade A-minus rents are forecast to fall by 8.7% between Q4 2020 and Q4 2023. Meanwhile, 10.4% drop is expected for Grade B buildings, as sharper adjustments may be necessary to secure tenants, especially for those lacking competitive edge.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Grade A Grade A-Minus Grade B All Grade

JPY/tsubo 55,000

Forecast

50,000 45,000 40,000 35,000 30,000 25,000 20,000

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

15,000 2008

In 2021, there is likely to be more large-scale tenants who will either relocate or reduce their space. These changes should lead to an increase in occupier turnover in Grade A office buildings, for which tenant activity has stagnated in 2020. As a result, the Grade A vacancy rate is expected to rise, trending at around the 2% mark until 2022 (FIGURE 4). At the same time, around 190,000 tsubo of new Grade A office space is slated for supply in 2023, a figure that would be the second highest in history after 2018. By Q4 2023, the Grade A vacancy rate is projected to reach 3.5%, a 2.3-point increase over Q4 2020. With this easing of the supply-demand balance, pressure is set to intensify on landlords to lower rents in order to attract tenants. Grade A rents are projected to fall by 8.7% to JPY 34,800 per tsubo over the same period (FIGURE 5).

FIGURE 5: TOKYO ASSUMED ACHIEVABLE RENTS

2007

Concerns over the economic outlook, however, have made many corporations cautious about capital expenditure, leading to a decrease in new office openings or expansions. Spaces sought after have become smaller compared to pre-pandemic. This has led to several larger buildings currently under construction taking longer to secure pre-lease tenants. Additionally, as it is estimated that it will take until H2 2022 before the economy is able to reach pre-pandemic highs, office demand is expected to remain weak.

Source: CBRE, November 2020. （The figures are as of Q4 of each year）

OFFICE | OSAKA

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

New Supply - other than Grade A Grade B Vacancy Rate (RHS) 16%

Forecast

70,000

14%

2023

2022

2021

0% 2020

0 2019

2% 2018

10,000 2017

2016

20,000

2015

2014

30,000

2013

2012

40,000

2011

10%

2010

50,000

2009

12%

2008

60,000

Source: CBRE, November 2020. .（ Vacancy rates are as of Q4 of each year）

FIGURE 7: OSAKA ASSUMED ACHIEVABLE RENTS JPY/tsubo

Grade A

Grade B

30,000

All Grade

Forecast

25,000 20,000 15,000 10,000

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

5,000 2009

While vacancies are rising in Grade B offices, some are expected to be taken up by companies aiming to cut costs. As such, while vacancy rates are projected to exceed 2% by Q1 2021, they are likely to be lower than Grade A, remaining at 3.0% at the end of 2022 and 2023. That said, Grade B rents are likely to enter an adjustment phase earlier than Grade A. We therefore forecast Grade B rents to fall by a somewhat larger margin of 3.9% between Q4 2020 and Q4 2023.

tsubo 80,000

2008

Demand from some industries remains robust, led by the IT sector, which has benefitted from the recent increase in remote working. However, as many companies are re-assessing their use of office space, less frequently used units are being relinquished, and partial cancellations are expected to continue to increase in the coming months. While new supply is limited to 16,000 tsubo in 2021, significant supply in excess of 40,000 tsubo is slated to come on stream in 2022, most of which will be in Grade A office buildings. As a result, while the Grade A vacancy rate will remain below 1% throughout 2021, it is projected to rise as high as 3.9% by Q4 2022 (FIGURE 6). With 2023 due to witness scant new supply, the vacancy rate should decline again slightly to around 3.3% by the end of the year. As occupiers’ rent affordability is declining, Grade A rents are estimated to peak in Q4 2020, followed by a moderate decline thereafter. By Q4 2023, they are projected to have fallen by 2.1% from their Q4 2020 high, to JPY 25,900 per tsubo (FIGURE 7).

Grade A New Supply Grade A Vacancy Rate (RHS) All Grade Vacancy Rate (RHS)

2007

The Osaka All Grade vacancy rate fell to an all-time low of 0.7% in Q1 2020. From Q2 2020 onwards, however, the impact of the pandemic began to be felt in earnest, with tenant activity weakening and relocation projects reconsidered or postponed. Furthermore, a marked increase was observed in partial cancellations. Vacancy rates have been on the rise for two consecutive quarters since Q2 2020, reaching 1.2% by Q3 2020, leading to stagnant rates of increase for All-Grade rents. Meanwhile, although Grade A rents fell in Q2 2020 for the first time in six and a half years, they were up again in Q3 2020, albeit marginally, by 0.2% q-o-q.

FIGURE 6: OSAKA NEW SUPPLY AND VACANCY RATE

2007

OSAKA: UPCOMING NEW SUPPLY TO PUT PRESSURE ON RENTS

O F F I C E | N A G O YA

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

50,000

New Supply - other than Grade A

Grade A Vacancy Rate (RHS)

Grade B Vacancy Rate (RHS) 16%

Forecast

14%

40,000

12% 10%

30,000

8% 20,000

6% 4%

10,000

2% 0% 2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

Source: CBRE, November 2020. .（Vacancy rates are as of Q4 of each year）

FIGURE 9: NAGOYA ASSUMED ACHIEVABLE RENTS JPY/tsubo

Grade A

Grade B

All Grade

30,000

Forecast

25,000

20,000

15,000

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

10,000 2009

By Q4 2023, the Grade A vacancy rate is expected to rise by 2.6 points to reach 3.8%, while rents are projected to continue a moderate decline, falling by 1.1% to JPY 27,750 per tsubo (FIGURE 9). 17,000 tsubo of new Grade B office space is slated to be completed in 2021, the largest volume of new supply since the 23,000 tsubo recorded in 2008. Due to weakening relocation demand, the Grade B vacancy rate should remain above 4% between H2 2022 and H2 2023, only falling to a projected 3.8% by Q4 2023. That said, given that less competitive buildings are likely to accelerate the rent adjustment, Grade B rents are projected to undergo slightly larger decline than Grade A rents, falling by 2.5% to JPY 13,800 per tsubo by Q4 2023.

Grade A New Supply All Grade Vacancy Rate (RHS)

2008

Over the next three years, 38,000 tsubo of new office space is slated to be completed, of which 10,000 tsubo will be Grade A (FIGURE 8). Since Q2 2020, demand for new office space or office expansion has been weak, and partial cancellations and downsizing are also expected to continue. For these reasons, new buildings are likely to come on stream with vacancies in the coming quarters. We also expect more vacancies in existing buildings to arise as a result of relocations to newly-completed buildings. Existing buildings with little competitive edge may struggle to find new tenants.

tsubo

2007

After falling to a record low in Q4 2019, the Nagoya All-Grade vacancy rate began to rise from Q1 2020. This was largely due to weakening demand for large-scale units, primarily from the manufacturing industry, which had started to be seen from H2 2019. The impact of the pandemic became apparent in Q2 2020, during which more companies began to reassess their office space needs following the implementation of remote working. The period also saw an increase in partial cancellations and downsizing relocations for cost-cutting purposes. While increased requirements for suboffices to avoid the so-called “three Cs” that facilitate virus transmission (closed spaces, crowds, and close contact) and temporary space for companies redeveloping their own properties were identified, demand weakened in general terms.

FIGURE 8: NAGOYA NEW SUPPLY AND VACANCY RATE

2007

NAGOYA: VACANCY RATE TO TREND UP ON NEW SUPPLY

OFFICE | REGIONAL CITIES

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Fukuoka

Takamatsu

Hiroshima

Kobe

Kiyoto

Kanazawa

Yokohama

Saitama

Sendai

0% Sapporo

We expect office demand in regional cities to bottom in 2022 or 2023 depending on the city, as the economy gradually recovers. Vacancy rates should begin to decline in most regional cities during 2022, with rents bottoming some time thereafter, before beginning to rise again. The pace of rise, though, is likely to be dictated by the volume of new supply. Relative to existing office stock, the amount of new office space slated for completion over the next three years is higher in Yokohama, Kanazawa and Fukuoka compared to other cities (FIGURE 10). In Yokohama, however, tenants have already been secured for most new spaces due for completion during 2021, and there is no new supply slated for 2022 at present. As a result, we forecast achievable rents to begin to rise in Yokohama as early as H1 2022, well in advance of the other cities.

12%

Nagoya

Nevertheless, the pandemic has so far had less of an impact on regional cities than on the three major metropolises (Tokyo, Osaka, and Nagoya). We believe there are two reasons for this. Firstly, lower population densities and different commuting situations mean that the number of workers still commuting to the office in regional cities has remained relatively high. Secondly, due to lower rent per tsubo and the prevalence of relatively smaller branch offices, office costs tend not to weigh as heavily on bottom lines as they do in the major cities.

15%

Osaka

In regional cities, 2020 started with an extremely tight supply-demand balance. In Q1 2020, five of the ten cities surveyed had vacancy rates of below 1%, and five of ten cities also recorded their highest rents since 2003. However, with the impact of the pandemic beginning to be felt from Q2 2020, leasing activity stagnated, with vacancy rates climbing in seven cities. A limited recovery in demand was observed from Q3 2020 in certain sectors, including call centres. However, overall demand has not returned to prepandemic levels, with vacancy rates rising in all seven cities surveyed in Q3 2020, and rents beginning to fall in five of them.

FIGURE 10: NEW SUPPLY AS A RATIO OF TOTAL STOCK (All Grade, 2021 – 2023 AGGREGATE)

Tokyo

REGIONAL CITIES:RENTS SET TO BOTTOM IN MOST CITIES IN 2022

Source: CBRE, November 2020.

OFFICE | REGIONAL CITIES

FIGURE 11: ALL-GRADE VACANCY RATE FORECAST FOR Q3 2020 TO Q4 2023

Q3 2020 - Q4 2023

Q3 2020

Q4 2023

FIGURE 12: ALL-GRADE RENT FORECAST FOR Q3 2020 TO Q4 2023 (Q3 2020 = 100) 2020 Q3 = 100

10%

102

100

Q3 2020 - Q4 2023

Q4 2023

8% 98

7% 6%

3% 2%

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Fukuoka

Takamatsu

Hiroshima

Kobe

Kyoto

Kanazawa

Yokohama

Saitama

Sendai

Sapporo

Nagoya

Osaka

Fukuoka

Takamatsu

Hiroshima

Kobe

Kyoto

Kanazawa

Yokohama

Saitama

Sendai

Sapporo

Nagoya

Osaka

Tokyo

Source: CBRE, November 2020.

Tokyo

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

R E TA I L

REBALANCE

R E TA I L | M A C R O E C O N O M I C O V E R V I E W

CONSUMPTION STAGNATES DUE TO PANDEMIC BUT SIGNS OF RECOVERY EMERGE IN H2 2020

FIGURE 1: RETAIL SALES VS NATIONWIDE DEPARTMENT STORE SALES (Y-o-Y %) Department Store Sales Retail Sales

Key retail indicators all stagnated in 2020 primarily due to the measures to contain the spread of COVID-19. In April and May, all retail indicators recorded their largest ever declines, as a result of government-requested store closings, drop in consumer sentiment, and a dramatic drop in inbound tourists. Since the lifting of the state of emergency in June, however, the rate of decline in these retail indicators has slowed, with spending beginning to recover in H2 2020.

40 20 0 -20

Total retail sales for September was 8.7% below the same month of the previous year (FIGURE 1). After recording a 13.9% y-o-y decline in April, retail sales began to recover, with August down only 1.9% y-o-y. September’s larger y-o-y decline was due to the same month in the previous year being affected by the front-loading demand ahead of the consumption tax rate hike. Nationwide department store sales also showed a similar trend; after registering a y-o-y decline of 72.8% in April, it had recovered to a y-o-y decline of 22.0% in August, before recording a larger decline of 33.6% in September, which was mainly due to the same month in the previous year being boosted by front-loadings, before the consumption tax rate was raised in October 2019.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

-40 -60

2020.09

2020.03

2019.09

2019.03

2018.09

2018.03

2017.09

2017.03

2016.09

2016.03

2015.09

2015.03

2014.09

2014.03

-80 2013.09

Real GDP increased by 5.0% q-o-q in Q3 2020, a strong rebound after the 8.2% q-o-q decline in Q2 2020. The most significant increase was observed in personal consumption, comprising over half of GDP, which rose by 4.7% q-oq, the largest q-o-q increase since 1980. Factors contributing to this recovery include the resumption of economic activity after the lifting of the nationwide state of emergency, the JPY 100,000 special cash payment provided by the government to all residents, and the implementation of the “Go To Travel” tourism support campaign.

Sources: Ministry of Economy, Trade and Industry, Japan Department Store Association, Datastream, CBRE (November 2020)

R E TA I L | M A C R O E C O N O M I C O V E R V I E W

The consumer confidence index (households of two or more people; seasonally adjusted) for October rose by 0.9 points from the previous month to 33.6, the second consecutive month in which the index has risen (FIGURE 2). The index fell to as low as 21.6 in April, the lowest since the current survey method was adopted in 2013. The 9.3 point m-o-m decline was also the sharpest drop ever recorded. Since May, however, the consumer confidence index has continued to recover. While it has yet to reach the levels seen prior to the pandemic, consumer confidence is gradually strengthening. At the same time, inbound tourist demand, previously the key driver of retail store demand and rent increases, remains essentially nonexistent. Inbound tourist number for October was down 98.9%y-o-y (FIGURE 3). Since April, tourist numbers have been consistently down on the previous year by around 99%. Although the government has begun to ease border restrictions, the only foreign nationals allowed to enter the country for the foreseeable future remain long-term residents and those traveling on business. As such, it may take some time for tourist numbers to recover.

FIGURE 2: CONSUMER CONFIDENCE INDEX 50

9 10 11 12 1

2019

9 10

2020

Sources: Japanese Cabinet Office, CBRE (November 2020)

FIGURE 3: THE NUMBER OF INBOUND TOURISTS IN JAPAN Thousand People 3,000

2019

-1.1%

2020

y-o-y(RHS) 0%

-20% 2,000 -40%

-58.3%

-60%

1,000 -80%

-93.0% -99.9%

0 Jan

Feb

Mar

Apr

-99.7% -98.9% -99.9% -99.4% -99.9% -99.9% May

Jun

Jul

Aug

Sep

Oct

Nov

-100% Dec

Sources: Japan National Tourism Organization, CBRE (November 2020)

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

R E TA I L | 2 0 2 0 I N R E V I E W

At the same time, some luxury brands still show willingness to pay the high rents demanded by an extremely rare prime properties near the Ginza 4chome intersection. As such, prime rents for Q3 2020 remained unchanged at JPY 400,000 per tsubo for the 20th consecutive quarter (FIGURE 6). While many luxury brands have suffered from depressed sales figures as a result of the pandemic, some such as high-end wristwatches are thriving, a reflection of wealth effect backed by stable stock market. ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Q2 2020

Q3 2020

2.0%

2.1%

－

1.7%

2.6%

Due to the challenging conditions created by the pandemic, no tabulations were made for vacancy rates in Q1 2020. Surveys of vacancy rates in major shopping districts were cancelled in order to reduce risk of infection.

Source: CBRE, November 2020.

FIGURE 5: GINZA HIGH STREET RENTS (JPY/TSUBO) 260,000 255,000 250,000 245,000

Q3 2020

Q2 2020

Q1 2020

Q4 2019

Q3 2019

Q2 2019

Q1 2019

Q4 2018

240,000 Q3 2018

While Ginza high street rents rose from 2017 to 2019, Q2 2020 saw a 2.2% fall on Q4 2019* 2 to JPY 252,200 per tsubo, and Q3 2020 saw a further q-oq drop of 2.1% to JPY 247,000 per tsubo (FIGURE 5). Factors behind this decline were the increase in availability as well as retailers becoming more cautious on rents.

Q1 2020*1

Q2 2018

The Q3 2020 Ginza high street vacancy rate was up 0.9 points q-o-q to 2.6%, or 0.6 points above the same period last year (FIGURE 4). There were several cases of retailers closing stores due to poor sales performance. While prime properties on the high street are still attracting interest from multiple retailers, they are all looking to pay rents that are either at or below market rates.

Q4 2019

Q1 2018

Several retail tenants in Ginza, who had already been struggling prior to the advent of COVID-19, chose not to renew their leases as a result of the pandemic. Elsewhere, negotiations with retailers for some of the premises on offer in the area were forced to be placed on hold. Meanwhile, there were almost no cases of retailers going as far as paying cancellation fees to terminate their ongoing contracts.

Ginza

Q3 2019

Q4 2017

The pandemic had a strongly negative impact on the retail rental market in 2020. Falling sales led many retail occupiers to file requests for extensions or reductions in rents with their landlords. These tenants include a wide variety of sectors; not just those for whom foreign tourist demand makes up the majority of sales, but also those for whom domestic consumers comprise their primary market.

FIGURE 4: GINZA HIGH STREET VACANCY RATES

Q3 2017

DEMAND FOR STORE OPENING DECLINES, GINZA HIGH STREET RENTS ARE ON A DOWNWARD TREND

Due to the challenging 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, November 2020.

FIGURE 6: TOKYO PRIME RENTS (GINZA) (JPY/TSUBO)

Ginza *3

Q3 2019

Q4 2019

Q1 2020*3

Q2 2020

Q3 2020

400,000

－

400,000

Due to the challenging conditions created by the pandemic, no tabulations were made for prime rents, high street rents in Q1 2020. Rent calculations were rendered problematic by the significant decrease in the number of new contracts signed during this period.

Source: CBRE, November 2020.

R E TA I L | 2 0 2 1 R E TA I L D E M A N D

-20

-40

-60

The current market, featuring more availability in prime locations, offers opportunities for retailers seeking location upgrade or floorspace optimization. As Japan has been able to keep COVID-19 infection rates lower than many other countries, there are also overseas brands actively pursuing the possibility of relocations in the area. The second type is retailers without a stand-alone stores in Ginza looking to make their first foray into the area. Most are retailers for whom the pandemic has not proven particularly damaging, or those wishing to raise their brand profile. Some are increasingly enthusiastic about opening stores in the Ginza area, as the fall in rents means that desired premises are more likely to be within their budgets.

2020.11

2020.10

2020.09

2020.08

-80 2020.07

Prior to the pandemic, retailers needing to relocate due to their premises being rebuilt or renovated were prepared to pay higher rents in order to maintain their presence in the Ginza area. Now, however, with more spaces available in prime locations, and with drop in inbound demand and low local turnouts (FIGURE 7), retailers can take their time to ensure that they secure the best possible rental conditions for their new premises.

2020.06

With no clear end to the pandemic still in sight, there is unlikely to be strong demand drivers in the Ginza retail rental market in 2021. There are, however, three key types of demand that may be anticipated. The first of these is retailers with existing stores in the Ginza area who are wishing to relocate. Reasons for relocation include the redevelopment of current premises, lease expiry, locational improvement or floorspace optimization.

FIGURE 7: PEDESTRIAN TRAFFIC TRENDS IN THE GINZA AREA COMPARED WITH PRIOR TO THE PANDEMIC*4 (DAILY RATE OF INCREASE AS AT 15:00) %

2020.05

SOME RETAILERS WILL BE SEEKING PREMISES

Seven-day moving average. Baseline for comparison is the period from January 18th to February 14th, 2020, before the pandemic. Foreign tourists are not included.

Sources: NTT Docomo Mobile Spatial Statistics, CBRE (November 2020)

FIGURE 8: GINZA HIGH STREET RENT FORECAST (JPY/TSUBO) Q4 2020 TO Q4 2022 300,000

Forecast

280,000 260,000 240,000 220,000

Q4 2022

Q2 2022

Q4 2021

Q2 2021

Q4 2020

Q2 2020

Q4 2019

Q2 2019

Q4 2018

Q2 2018

Q4 2017

Q2 2017

Q4 2016

Q2 2016

Q4 2015

Q2 2015

200,000 Q4 2014

Finally, demand is also likely to come from luxury brands. While the luxury goods market also contracted somewhat in 2020, its high-margin business model means that the retailers can withstand such downturns more easily. While it may be limited to prime locations, some may take up premises at preCOVID levels of rents for units befitting their strategies.

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

R E TA I L | O U T L O O K

RENTS MAY FALL FURTHER IN 2021 BUT MAY BOTTOM BY THE YEAR-END After peaking in Q2 2016, Ginza high street rents fell for a while before bottoming out in Q3 2017. Rents remained pretty much unchanged thereafter, with small quarterly increases of 0.8% in both Q4 2018 and Q3 2019. In 2020, however, the pandemic had a significant impact on the market, with a 2.2% fall from Q4 2019* 5 in Q2 2020, and a 2.1% q-o-q decline in Q3 2020. Currently, Ginza high street rents stand at JPY 247,000 per tsubo.

According to CBRE’s latest retailer survey* 6, conducted in October, appetite among retailers to establish new stores is relatively high. When asked about their retail plans for the next 12 months, 65.6% of respondents indicated that they planned to open one or more new stores. The results of the survey suggest that many retailers are closely watching the market and available properties, waiting for an opportunity befitting their brand strategy.

CBRE expects rents to decline further in 2021 for three primary reasons. The first of these is that inbound tourist demand, previously the key driver of rent increases, is anticipated to take some time to recover. The second reason is that the accelerated adoption of remote working and many shoppers’ reluctance to visit crowded areas mean that the number of consumers visiting the area is yet to return to pre-pandemic levels. The third reason is that retailers are now taking their time in selecting the ideal units for their needs due to the increase in available properties.

FIGURE 9: RETAIL PLANS BY SEPTEMBER 2021 (N=64) 0%

Due to the challenging conditions created by the pandemic, no tabulations were made for prime rents, high s treet rents or vacancy rates in Q1 2020. Rent calculations were rendered problematic by the significant decrease I n the number of new contracts signed during this period, while surveys of vacancy rates in major shopping districts were cancelled in order to reduce risk of infection.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

40%

60%

80%

Open a new store Strengthen EC sales Review the store opening area Strengthen cooperation between EC and physical stores

As a result of the above factors, CBRE projects that by Q4 2021, Ginza high street rents will have fallen by 7.5% from their Q3 2020 level of JPY 247,000 per tsubo. Even if the Tokyo Olympic Games, rescheduled for the summer of 2021, do go ahead as planned, they are likely to be restricted in scope. In that case, not only will the economic effects of the games be considerably smaller in scale than initially expected, but consumer confidence and retailer needs are also unlikely to return to their pre-COVID-19 levels. An economic recovery is expected thereafter, however, leading to rents rising from Q1 2022. As a result, a net drop of 4.3% is projected over the next two years. Prime rents for the extremely exclusive properties near the Ginza 4chome intersection, are anticipated to remain unchanged. Although retailer demand is on the decline, there are number of luxury brands, boosted by the wealth effect, which remain keen to establish stores in this prime location.

20%

Reduce the number of existing stores Increase the number of pop-up store openings Expand the area of existing stores Maintain the status quo for both the number of stores and the area of existing stores Reduce the area of existing stores Other Source: CBRE, November 2020. *6

Survey respondents were retailers with street-level stores in the major retail areas (Ginza, Omotesando/Harajuku, Shinjuku, Shibuya, Sakae, Shinsaibashi, Tenjin).

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

LO G I S T I C S

RESILIENCE

LO G I S T I C S | M AC R O E C O N O M I C OV E R V I E W

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

FIGURE 1: PERCENTAGE OF HOUSEHOLDS ORDERING OVER THE INTERNET (TWO-OR-MORE-PERSON HOUSEHOLDS) 2018

55%

2019

2020

50.9% 50%

45%

One of the major sources of demand is e-commerce. Since 2008, the e-commerce market in Japan has expanded by an average of over 11% per year. The rise in demand for stay-at-home goods amidst the pandemic is seen to have accelerate that pace (FIGURE 1). In order to expand their distribution networks to handle an increased volume of goods, e-commerce platform operators are aggressively pursuing the acquisition of more logistics facilities. Stay-at-home demand not only increased demand for general consumer goods, but also increased the requirement for inventories for such goods. This has reinforced the status of logistics facilities as an essential infrastructure. Another driver of demand is the automation of logistics operations. As freight volume continues to increase, logistics companies are seeking to implement the latest technological solutions in order to improve efficiency, both within the warehouse and in distribution networks, a process which often requires the simultaneous expansion of warehouse floorspace. To be sure, companies who have been adversely affected by pandemic may be forced to temporarily scale back their capex. However, as labour shortage is viewed as likely to restrict future profits, there is also a sense of urgency to initiate reforms to ensure companies maintain their competitive edge. Also, companies looking to effectively shorten haulage distances between the major metropolises, demand for logistics facilities around regional cities or near transport hubs is on the rise. Such stable demand has raised the profile of logistics facilities relative to other asset types in the eyes of developers and investors, leading to the planning of significant new supply（FIGURE 2）.

40%

35%

30% Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: Ministry of Internal Affairs and Communications

FIGURE 2: LMT MRKET NEW SUPPLY AND THE RATIO OF TOTAL STOCK IN Q4 2020 tsubo 1,600,000

2021

2022

New supply ratio in 2-years of total stock in Q4 2020 (RHS) 50% 40%

1,200,000

30% 800,000 20% 400,000

10%

0% Greater Tokyo

Greater Osaka

Greater Nagoya

LMT: Large Multi-Tenant logistics (More than 10,000 tsubo in the Greater Tokyo Area, Greater Osaka Area and More than 5,000 tsubo in Greater Nagoya Area)

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

L O G I S T I C S | G R E AT E R TO K Y O A R E A

GREATER TOKYO AREA: VACANCY RATES TO REMAIN LOW EVEN WITH SIGNIFICANT NEW SUPPLY IN 2022 While the Greater Tokyo LMT* 2 market in 2020 saw large new supply that trailed only 2018 and 2019, new demand continued to outstrip supply for the second consecutive year. Since reaching a new record low of 0.5% in Q1 2020, the vacancy rate maintained this level through Q3, and appears set to finish the year at similar level. Initially, it was expected that logistics demand would also be somewhat impacted by the pandemic. In reality, however, acceleration in the growth of e-commerce, together with demand for automation to address operation issues such as manpower shortages, have meant that demand has been significant enough to overcome any negative economic effects. Compelling evidence for this assertion can be found in the fact that large contracts signed by logistics and e-commerce companies are on the rise, with nine of the 20 newly-completed buildings this year wholly taken by single tenants. New supply of 630,000 tsubo is scheduled for 2021 and 890,000 tsubo for 2022, figures that would break all existing records. Despite this, pre-leasing trend continues to accelerate, with tenants already confirmed for over 60% of the new floorspace available in 2021. For this reason, two consecutive years of record-breaking supply is unlikely to overly impact the market balance. While the vacancy rate should rise, it should still remain generally low, with CBRE projecting 1.2% in Q4 2021 and 2.8% in Q4 2022. With a sub-1% vacancy rate, effective rents in the Greater Tokyo area is projected to have risen by 3% for 2020 as a whole. The large new supply slated for the next couple of years, however, may somewhat slow down the pace of rent rise from here. That said, vacancy rates are still expected to remain fairly low, meaning that rents should continue to trend up. CBRE projects an average annual increase of 1.7% over the next two years, bringing rents to JPY 4,570 per tsubo by Q4 2022.

FIGURE 3: GREATER TOKYO LMT MARKET : SUPPLY/DEMAND BALANCE

LMT: Large Multi-Tenant logistics(More than 10,000 tsubo in the Greater Tokyo Area)

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Net Absorption

Vacancy Rate (RHS) 10%

Forecast 800,000

600,000

400,000

200,000

0% 2015

2016

2017

2018

2019

2020

2021

2022

Source: CBRE, November 2020.

FIGURE 4: GREATER TOKYO LMT MARKET : EFFECTIVE RENT BY AREA Tokyo Bay Area Route 16 Area Greater Tokyo Overall

JPY/tsubo 8,000

Gaikando Area Ken-O-do Area

Forecast 7,000

6,000

5,000

4,000

3,000 *2

New Supply

tsubo 1,000,000

2015

2016

2017

2018

2019

2020

2021

2022

Source: CBRE, November 2020.

L O G I S T I C S | G R E AT E R TO K Y O A R E A

GREATER TOKYO AREA BY AREA: STRONG DEMAND IN THE GAIKANDO AREA SET TO KEEP OCCUPANCY RATES HIGH Vacancy rates for 2020 have remained below 1% in all areas, with almost no vacancies in existing buildings throughout Greater Tokyo. While vacancy rates had trended around 20% in the Ken-o-do area until 2018, they have fallen to around 1% since Q4 of 2019, with little chance of a sudden future increase. The primary factors behind this dramatic shift have been the improved convenience of the Ken-o-do since the road was extended to the Narita Interchange, and the fact that the vacancy rate in the adjoining Route 16 area dropped to 0.1% in Q3 2020, leaving potential tenants with extremely limited options across the wider area. During 2021, vacancy rates are expected to maintain extremely low levels just above or even below 1% in all areas. From 2022, however, vacancy rates are expected to rise slightly in some areas. Two new facilities are slated for completion in the Tokyo Bay area in 2022, the first time for the area to have two new completions in the same year. As a result, its vacancy rate is projected to increase to 4.8%. Such significant new supply in an area with sparse existing stock means that any vacancies remaining upon completion will automatically push up the vacancy rate in the area as a whole. The Route 16 area, where the most significant amount of new supply is planned, should see vacant floorspace in new properties gradually increase in 2022, leading to a projected vacancy rate of 2.8%. The Ken-o-do area also appears set to be affected by this new supply in the neighbouring Route 16 area, with its vacancy rate projected to rise as high as 3.9%. The Gaikando area is anticipated to be the outlier, maintaining an extremely low vacancy rate. CBRE projects a vacancy rate of just 0.6% in Q4 2022. The area’s evaluation as a location for logistics facilities improves every year, due to the advantages it enjoys in terms of transportation convenience and relative ease of securing workforce. Despite its reputation, however, fewer properties are under development in the area compared to other areas, meaning that any new facilities are likely to enter operation with high occupancy rates.

FIGURE 5: GREATER TOKYO LMT MARKET : VACANCY RATE BY AREA Tokyo Bay Area Route 16 Area Greater Tokyo Overall

20%

Gaikando Area Ken-O-do Area

Forecast 16% 12% 8% 4% 0%

2015

2016

2017

2018

2019

2020

2021

2022

Source: CBRE, November 2020.

FIGURE 6: GREATER TOKYO LMT MARKET : NEW SUPPLY BY AREA Tokyo Bay Area Route 16 Area

tsubo 1,000,000

Gaikando Area Ken-O-do Area

Forecast 800,000

600,000

400,000

200,000

2015

2016

2017

2018

2019

2020

2021

2022

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

L O G I S T I C S | G R E AT E R O S A K A A R E A / G R E AT E R N A G O YA A R E A

GREATER OSAKA AREA: VACANCY RATES TO DROP DESPITE SIGNIFICANT 2021 SUPPLY AS DEMAND REMAINS ROBUST The LMT* 3 vacancy rate in the Greater Osaka area is projected to fall to around 3.7% in Q4 2020. Although 160,000 tsubo of new floorspace has come available during 2020, fresh demand of roughly the same amount is projected. From 2021 onwards, new supply is expected to stimulate demand. While 280,000 tsubo is slated for completion in 2021, close to an all-time high of 290,000 tsubo in 2017, tenants have already been secured for approximately 75% of this floorspace. Demand from potential tenants planning large-scale distribution centres remains strong. Also, new supply in 2022 is less than 100,000 tsubo. Vacancy rate is expected to drop below 2% in 2022. Effective rents is expected to have rise by more than 4% for the whole of 2020. An average annual increase of approximately 2% is anticipated for the next two years, with Q4 2022 rent projected to reach JPY 4,130 per tsubo. *3

FIGURE 7: GREATER OSAKA LMT MARKET : SUPPLY/DEMAND BALANCE tsubo

New Supply

Net absorption

Vacancy Rate (RHS)

Forecast

300,000

120,000

12%

90,000

60,000

30,000

5% 0%

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

2019

2020

2021

2022

Vacancy Rate (RHS)

15%

100,000

2018

Net absorption

150,000

10%

2017

New Supply

20%

150,000

FIGURE 8: GREATER NAGOYA LMT MARKET: SUPPLY/DEMAND BALANCE tsubo

15%

50,000

LMT: Large Multi-Tenant logistics(More than 5,000 tsubo in the Greater Nagoya Area

180,000

200,000

2016

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

25%

250,000

2015

The LMT* 4 vacancy rate in the Greater Nagoya area for Q4 2020 is projected to be slightly lower than a year ago, at 9.5%. The lack of dramatic drop is mainly due to tenants becoming more cautious as a result of the pandemic.

LMT: Large Multi-Tenant logistics(More than 10,000 tsubo in the Greater Osaka Area)

350,000

GREATER NAGOYA AREA: NEW SUPPLY SET TO STIMULATE DEMAND

Forecast

18%

0% 2015

2016

2017

2018

2019

2020

2021

2022

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

INVESTMENT

REVISIT

INVESTMENT

INVESTMENT IN 2020 DRIVEN BY LOGISTICS AND RESIDENTIAL Cumulative transaction volume for the first three quarters of 2020 reached a total of JPY 2.6 trillion, up 3% y-o-y. With the economy stagnating as a result of the pandemic, the logistics and residential sectors, which are seen as offering relatively stable cash flow, have proven popular with investors (FIGURE 1). Cumulative transaction volume in these two sectors for the same period reached JPY 1.2 trillion, up 95% y-o-y. With the introduction of remote working prompting many companies to consider changing working styles, the mid-to-long term outlook for office demand has become increasingly opaque. As such, total cumulative office transaction for the same period dropped 11% y-o-y to JPY 898 billion. INCREASE IN TRANSACTION VOLUME LARGELY DUE TO FOREIGN INVESTORS

FIGURE 1: TRANSACTION VOLUME BY SECTOR Q1-Q3 2019 Q1-Q3 2020

JPY bn

1,200

1,000

800

600

400

200

In terms of domestic investors’ cumulative transaction volume for the first three quarters of 2000, deals by J-REITs was JPY 860.4 billion (down 19% y-oy), and those by other domestic investors was JPY 772.0 billion (down 22% yo-y) (FIGURE 2). The decline in investment volume by domestic investors other than J-REITs was largely due to an increase in cancelled or postponed transactions in April and May, when a nationwide state of emergency was declared, as well as decrease in new deals resulting from a more cautious attitude among investors in response to the uncertainty wrought by the pandemic.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Office

Industrial

Residential

Retail

Hotel

Others

Transactions of at least JPY 1 billion, excluding acquisitions by J-REITs at IPO. Source: Real Capital Analytics, CBRE, October 2020

INVESTMENT

Meanwhile, overseas investors’ cumulative transaction volume for the first three quarters in 2020 increased by 103% y-o-y, to JPY 990 billion. There are three major factors behind this increase. The first is that the continuation of easy monetary policies worldwide has led the institutional investors to channel their funds into relatively high-yielding real estate assets. The second is that the Japanese real estate market has not been as negatively affected by the pandemic compared to major markets in Europe and North America, and the domestic political situation also remains relatively stable. The third is the relatively high cap rate spread. Broken down by asset type, 39% of all foreign investment this year has been in residential properties, 30% in offices, and 17% in logistics facilities. In particular, residential sector has recorded a 70% increase in transaction volume over the previous year.

FIGURE 2: MAJOR TRANSACTION VOLUME BY INVESTOR TYPE Domestic (J-REITs) Domestic (Others) Overseas

JPY bn

6,000 5,000 4,000 3,000 2,000 1,000 0

2012

2013

2014

2015

2016

2017

2018

2019

Q1-Q3 Q1-Q3 2019 2020

Transactions of at least JPY 1 billion, excluding acquisitions by J-REITs at IPO. Source: Real Capital Analytics, CBRE, October 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

INVESTMENT

FALL IN J-REIT INVESTMENT PRIMARILY DUE TO SLUGGISH SHARE PRICES

JAPANESE INVESTORS’ APPETITE LIKELY TO RECOVER IN 2021

The y-o-y decline in J-REIT transactions was primarily due to weak J-REIT share prices and fewer public stock offerings as a result. A total of JPY 343.4 billion was raised by J-REITs via public stock offerings from Q1 to Q3 2020, a decrease of 22% y-o-y. Similarly, real estate investment by J-REITS fell 19% yo-y to JPY 860.4 billion for the first three quarters of the year. The share prices of logistics J-REITs, however, performed well. While the TSE REIT index fell by 20% during the year to end-November, the share price index for the seven logistics J-REITs rose over the same period by 16%. The logistics J-REITs raised a total of JPY 192 billion via public stock offerings during the first three quarters of the year, 70% more than the same period in the previous year. Total cumulative investment in logistics facilities by J-REITs increased by 56% to JPY 458.9 billion, making it the only asset type to show an increase in JREIT transaction volume from the previous year.

While investment appetite among Japanese investors waned following the onset of the pandemic, it began to show signs of recovery in 2H 2020. CBRE’s latest investor survey*1, conducted in November 2020, found that 94% of investors anticipate that acquisition volume in 2021 will either match or exceed the previous year, a similar figure to the 93% recorded in previous year’s survey (FIGURE 4). Continued high levels of investment from overseas, led by the institutional investors, can also be expected in 2021. With interest rates set to remain low globally, institutional investors faced with difficulties in procuring profits are expected to continue to pour funds into relatively higher yielding real estate assets. CBRE estimates that total equity to be invested in Asia Pacific by close-ended funds over the next three to five years will reach approximately USD 57 billion (JPY 6 trillion). As of the end of Q4 2020, Japan has weathered the pandemic relatively well compared to major markets in Europe and North America, while the local political situation also remains stable. With a high cap rate spread functioning as another contributing factor, Japan should continue to remain one of the most attractive real estate investment destinations in Asia Pacific. * 1 Preliminary data (finalised data is planned for release in February 2021)

FIGURE 3: J-REIT STOCK PRICE INDEX BY ASSET TYPE IN 2020 (Jan = 100) TSE REIT

Office

Retail

Residential

FIGURE 4: EXPECTED PURCHASING ACTIVITY

Industrial

Buy more than last year Buy as same as last year Buy less than last year

140 120

31%

2019

60%

100

44%

2020

80 60

47%

2021

40 Jan

Feb

Mar

Apr

May

Jun

Source: Datastream, CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Jul

Aug

Sep

Oct

Nov

Dec

49%

20%

48% 40%

60%

6% 80%

100%

Source: CBRE, November 2020.

INVESTMENT

INVESTMENT STRATEGIES IN THE COVID-19 ERA Asset types less prone to economic fluctuations and which can provide stable income streams are set to remain keenly sought after in 2021 (FIGURE 5). With a faster pace of increase in e-commerce as a result of stay-at-home consumption, logistics facilities continue to attract robust leasing demand. Investors new to the sector have also demonstrated an interest in this asset class, leading to fierce competition among the purchasers. Other asset types have shown a decline in tenant demand since Q2 under the influence of the pandemic. Increase in vacancy in the office market have been observed in recent months, suggesting that rents in Tokyo as well as in regional cities are likely to weaken in 2021. Additionally, demand for city center retail facilities and hotels, both of which are asset types heavily reliant on inbound tourism, is still unlikely to demonstrate any significant recovery in the short term. However, interest for such assets as office and hotels remain high among investors with long-term investment horizon. Investors value offices for their tenant diversity and scale of investment. Hotels are gaining traction particularly among investors seeking distressed opportunities. They are also expected to offer decent returns once inbound demand recovers.

FIGURE 5: ATTRACTIVE ASSET TYPE IN 2021 0%

10%

20%

30%

40%

50%

Industrial and logistics

Office

Residential

Hotels / Resorts

* Preliminary data (finalised data is planned for release in February 2021) Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

INVESTMENT

OTHER INVESTMENT TARGETS GAINING TRACTION There are other asset types that have proven popular as alternative investment opportunities: data centres, for which the investment market can be expected to expand over the mid-to-long term; and assets shed by companies negatively impacted by the pandemic. Investor interest in data centres has continued to increase during the pandemic. CBRE’s latest quarterly investor survey carried out in Q3 2020 revealed that some 22% of investors are “considering investing in data centres”, up from the 18% recorded in Q1 2020. Factors behind this burgeoning interest include an increase in the volume of data handled by these data centres as a result of the sharp uptick in remote working following the onset of the pandemic, and the stable income streams and relatively high yield these assets can be expected to provide. As very few assets of this type are offered in the market, investment opportunities tend to center around development or sale-and-leaseback transactions.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

An increase in the sale or sale-and-leaseback of non-core corporate assets has also been observed in the investment market in recent months. Assets are varied in type, including offices, storage space and former factory sites, while buyers include investment funds and real estate companies. Investment interest has been so high that some transactions have been made at above asking prices. On the other hand, assets which have taken longer to find buyers have usually involved fundamental problems which have discouraged investors from purchasing them. As many such properties were designed for internal company use, they feature specifications ill-suited for leasing to multiple tenants. Other properties, hitherto operated only within the company, simply do not meet the requisite quality standards for commercial real estate. A sound strategy based on a detailed analysis of the rental and investment markets will be essential for any company wishing to divest itself of its assets at a price with which it is comfortable.

INVESTMENT

INVESTMENT IN 2021 TO BE DRIVEN BY INVESTORS WITH AMPLE CAPITAL Based on stable tenant demand and high fluidity, investor appetite for prime assets remains high, even in a market that continues to be affected by the pandemic. However, differences in tenant demand and rent trends (FIGURE 6) mean that projections for future investor demand will differ by asset type. Tokyo prime asset yields for 2021 are projected to decline for logistics facilities, with slight increases anticipated for both offices and retail properties (FIGURE 7). Full year investment volume for 2020 is projected to be around the similar level as the previous year. We also expect to see a similar volume for 2021. While we may not see a major transaction in excess of JPY100bn as we have seen in 2020, this is likely to be offset by increase in small- to mid-sized deals. Institutional investors continue to be impacted by worldwide low interest rates,

FIGURE 6: RENTAL OUTLOOK BY MAJOR ASSET TYPE IN TOKYO y-o-y

2019

2020E

and are consequently expected to direct their funds into relatively high-yield real estate assets. Also, the number of companies beginning to consider saleand-leaseback strategies has shown an increase in H2 2020, leading to the possibility that many of these contracts will be signed in 2021. Meanwhile, pricings have been more or less unchanged from the prepandemic levels for most asset types. Furthermore, although easy monetary policies have provided accommodative environment for fund raising, the longer the pandemic continues, the more selective lenders are likely to become. Indeed, several cases were noted in 2020 in which non-recourse loans were unable to be secured. CBRE predicts that purchasing in the coming year will continue to be driven by investors and companies with ample resources at their disposal.

FIGURE 7: PRIME YIELDS OUTLOOK FOR TOKYO ASSETS 2021F

Q1 2007～ Q3 2020

Q3 2020

Q4 2021 Outlook

0% 4%

-2% -4%

-6% -8%

2% Office (GradeA)

Retail (Ginza, Hight-street)

Source: CBRE, November 2020.

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

Logistics (Multi-tenant, Greater Tokyo)

2.7% 2.6% Office (GradeA)

3.1% 2.9% Retail (Ginza, Hight-street)

3.4% 3.2% Logistics (Multi-tenant, Tokyo Bay Area)

Source: CBRE, November 2020.

C O N TA C T S

Japan Research Hiroshi Okubo Executive Director Head of Research hiroshi.okubo@cbre.co.jp

Yuji Iwama Associate Director Office Team Leader yuji.iwama@cbre.co.jp

Yoshitaka Igarashi Associate Director Office Team Leader yoshitaka.igarashi@cbre.co.jp

Hisari Asai Senior Analyst Office Team hisari.asai@cbre.co.jp

Sayuri Kaneko Analyst Office Team sayuri.kaneko@cbre.co.jp

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

Kaoru Kurisu Director Retail Team Leader kaoru.kurisu@cbre.co.jp

Kumiko Ninomiya Analyst Retail Team kumiko.ninomiya@cbre.co.jp

Asuka Honda Director Investment Team Leader asuka.honda@cbre.co.jp

Henry Chin, Ph.D. Head of Research, APAC/EMEA henry.chin@cbre.com.hk

Ada Choi, CFA Head of Occupier Research, Asia Pacific Head of Research, Greater China ada.choi@cbre.com.hk

Jonathan Hills Senior Director, Asia Pacific jonathan.hills@cbre.com.hk

Cynthia Chan Office Specialist, Asia Pacific cynthia.chan@cbre.com.hk

Liz Hung Retail & Logistics Specialist, Asia Pacific liz.hung@cbre.com.hk

Leo Chung, CFA Capital Markets Specialist, Asia Pacific leo.chung@cbre.com.hk

Regional Research

ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2021 | JAPAN

NOTES

A S I A P A C I F I C R E A L ES T A TE M A R K E T OUTLOOK | JAPAN

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