Japan's industrial vacancy rates at an all-time low of 0.2%

Thanks to strong pre-leasing activity in both the bay area and inland areas.

The logistics sector has reigned supreme during the COVID-19 era. Despite the adverse impact that the global pandemic has had on other sectors, rents have stayed strong and vacancy levels remain at all-time lows.

The shift in consumer buying patterns from traditional retail stores to online retail was expedited by the pandemic, and this has in turn led to an increase in demand for warehouse space to better facilitate inventory management as some companies adapt to higher e-commerce volumes. Indeed, the pandemic has served as a tailwind for the logistics sector, and growth looks promising with high levels of investment pouring in.

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The strength of the logistics sector has held steadfast in the past year. Vacancy rates in Greater Tokyo are at all-time low levels of 0.2%, tightening 1.7 percentage points (ppts) year-on-year (YoY) despite the high levels of supply entering the market in recent years. The low vacancy levels can be attributed to strong pre-leasing activity in both the bay area as well as inland areas, and it is worth noting that net absorption levels have been consistently higher than new completion levels since 2017. This trend has been bolstered by the pandemic accelerating the rise of online shopping which has consequentially boosted the demand for warehouse space. Hence, the surge of supply expected in 2021 appears welcome in the current market.

In alignment with prevailing robust market conditions, rents in the Greater Tokyo area have exhibited growth of 0.9% YoY, and currently stand at JPY4,410 per tsubo. For instance, asking rents in Kanagawa have surpassed JPY5,000 per tsubo, reaching record-high levels. Notable rent increases have also been observed in regions of Chiba. However, while rents maintain record levels, growth appears to have slowed since 2020, suggesting an affordability threshold has been reached for some industries. Nevertheless, the market still shows promise with some areas showing marked increases in rents.

Similarly, in Greater Osaka, market fundamentals within the logistics sector have stayed strong. Vacancy rates have remained at levels of 2.8%, having increased slightly from the past quarter. Nonetheless, 2020 has still overall hosted the lowest vacancy levels in the region. Supply in Greater Osaka has cooled slightly in 2H/2020, allowing net absorption levels to catch up, and thus levelling demand with supply. Furthermore, average rent levels in the Greater Osaka region have breached the JPY4,000 per tsubo barrier for the first time, increasing by 7.5% YoY. In fact, rents have risen considerably over the past two years, growing 15.6%. Indeed, the Greater Osaka market has strong winds in its sails, and with preleasing activity for upcoming supply going smoothly, the region’s outlook appears favourable.

INCOMING SUPPLY

There was no slowdown in Greater Tokyo supply during 2020 despite multiple consecutive years of increased volumes, and completed projects delivered only marginally less space than in 2019 - a record year. Some of the completions in 2H/2020 were of significant scale1 , and the largest addition to the region was the Goodman Business Park – East Gate in Chiba completed in October 2020. The 4F facility boasts an NRA of over 111,000 sq m and is already fully leased. Developed by Goodman Japan, the facility was the fourth stage of the Goodman Business Park series, with a fifth project expected to be completed in mid-2021. Another large contender recently entering the market was the DPL Nagareyama III, developed by Daiwa House Industry. With an NRA of over 100,000 sq m, the facility is the second largest to have been built in 2020 by the developer.

Greater Tokyo is also looking forward to high levels of supply in the coming years. In fact, 2021 and 2022 are already forecast to have supply levels that surpass that of 2020. Looking closer, 2022 supply is forecast to be at a record level of greater than 3 million sq m, with fifteen projects of significant scale already announced. Vacancy levels of completed facilities in the area are at alltime lows, and therefore these high levels of supply should satisfy some of the current demand.

Like its counterpart, Greater Osaka is also looking forward to high levels of supply, with 2021 levels forecast to surpass its previous record, set in 2017. In addition to the Prologis Park Inagawa 1 and 2, expected to bring in a total of more than 370,000 sq m of GFA, there are other multiple projects of significant scale in the 2021 pipeline, including those from LOGiSTA, LOGIFRONT and SOSiLA.

Recently, an increase in the number of upcoming inland logistics facilities that are located close to major expressways like Hanshin and Meishin has been observed. These areas provide convenient access to the transport network in the Kansai region of Japan, and such locations are likely to increase in popularity going forward.

Indeed, infrastructure development, as well as land readjustment projects have made more regions viable and available as suitable locations for logistics centres. Moreover, the strength of the sector has afforded developers the financial capability to afford the higher land prices of more convenient locations that were previously unavailable. Given these factors, and the shorter lead time for logistics development, supply and demand may shift into equilibrium sooner than some market participants anticipate.