Tokyo’s logistics rental growth – what options do tenants have?

December 6, 2019 / By  

The demand for large modern logistics facilities has increased due to the boom of e-commerce firms, changing consumer behaviour towards online purchases, and the decrease in working population especially in the industrial sector. These combined factors have led to the introduction of automated facilities and equipment – a focus for logistics facilities as we move towards the next decade.

Vacancy rate for large modern logistics facilities in greater Tokyo area has fallen to the 2% range. Most of the new supply is fully leased upon completion, while announced new supply is increasingly being taken up well before completion.

Ken-O Expressway, a ring road surrounding the Tokyo CBD, was completed for the most part in 2017. It marked the shift of the logistics market in Greater Tokyo area from expansion phase when the highway network was being established to a mature phase.

During the previous expansion phase, new supply in larger geographic areas provided facilities that set rents below the average, hence competing for tenants on the affordability index. Consequently, rent remained flat at contract renewal stage as existing tenants had the choice of moving to a new logistics area, thus preventing landlords in established logistics areas from raising rents to keep the tenants.

In the current tight and mature market environment, new supply is being offered at higher-than-average rents. Owners of existing properties are also bullish with renewal negotiations, referencing the high rents of new supply for tenants who do not have ready relocation options.

Depending on the area, some renewals are resulting in 10-15% increase in rent, providing a comfortable and profitable environment for owners but a severe situation for tenants as that adds on to their costs.

If existing tenants do not plan ahead of their lease expiry, they will have no choice but to accept the higher rents demanded by the owner. They may consider relocation to another logistics property or buying a site for their own development but finding a property for relocation is difficult in the current tight market. Moreover, developers are buying prospective development lots at higher prices, making it difficult for companies to find a suitable site for purchasing.

If a tenant wished to execute the strategies stated above in the current market, they must start considering their options at least two to three years before expiry of their lease. With the vacancy rate at a historic low, it is quite difficult to find a property that will become vacant in a year that meets the tenant’s space and location requirements. If the relocation is scheduled in three years’ time, facilities in the pipeline can be considered hence giving the tenant more choices.

We expect rents for large modern logistics facilities in Greater Tokyo Area to increase by 2.0% in 2019 and by 2.3% in 2020 and 2021. It is never too early for tenants to consider the available course of action against the rising rent.

Figure 1: Greater Tokyo: Rents and Vacancy Rate

Source: JLL Oct 2019

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