Surprisingly, for such an advanced country, Japan has lagged behind other developed nations when it comes to the supply of modern logistics space.  The percentage of modern distribution centres against the total stock of all warehouses still remains low at around 3%.  As a result, developers and operators have been looking at the Japan logistics market with a keen eye.

Foreign developers and investors such as GLP, Prologis and LaSalle Investment Management, and domestic developers such as Daiwa House, Mitsui Fudosan and Nomura Real Estate Development have been bringing new logistics facilities to the market in recent years. However, the main focus has been on development in Greater Tokyo.  At present, greater Tokyo accounts for the lion’s share of industrial space in Japan, standing at 6.5 million sqm, with Osaka home to only 1.9 million sqm.

This is now changing and development at many Osaka sites is already underway.  Over the next three years, JLL forecasts that the Greater Osaka logistics market will double in size as a result of this new supply.

Figure 1 – Greater Osaka modern logistics facility stock (end-2015 vs. end-2018)

Source: JLL Research
Note: Modern logistics facility definition: GFA over 50,000 sqm, completion later than 2000

Such an explosion in stock would normally raise an eyebrow about spiking vacancy rates and concerns about the impact that this might have on rental and capital values.

However, we think that these concerns can be somewhat mitigated.  These numbers are coming off a low base and changes in consumer behaviour in Japan are beginning to fuel significant demand for modern logistics space in Osaka, the second largest economy in Japan.

Japanese consumers have historically had very high adoption rates of broadband internet, but have lagged their western counterparts when it comes to the uptake of modern online retail.  This behaviour is changing and consumers post the Global Financial Crisis have been flocking to online retail.  Indeed, Japanese consumers are expected to have spent close to US$90 billion on online retail in 2015 alone, up 14% Y-o-Y according to Internet Retailer.  It’s not just the Japanese shopping online that’s benefiting these Japanese online retailers.  Rakuten Ichiba, Japan’s largest online retailer with 20% market share, reported 58% growth Y-o-Y in 4Q15 from Chinese consumers and up 55% Y-o-Y from the US.  As a result the e-commerce and 3PL industries are seeing significant expansion, and this is driving notable demand for existing modern logistics facilities.

Figure 2 – E-commerce / 3PL market size (Japan)

Consequently, the current vacancy rate in Osaka is very low and there is significant pent up demand in the market due to the lack of large contiguous space available.  We have also witnessed existing manufacturers in some instances moving from existing owner occupied units to more sophisticated real estate provided by third party operators.  Should this emerge as a trend, this should provide further support.

Whether or not all of this new stock coming to the market will be taken up quickly enough so as to avoid any significant increase in vacancy rates remains to be seen.  However, what is more significant longer term will be the opportunities that shifting consumer behaviour will continue to create for the development of this sector as a whole.

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