Supply chain reorganization and resurgent GDP growth
characterize the demand backdrop. Business continuity planning
has always been a priority in Japan and accelerated after the
Japan earthquake in 2011. The rise of multichannel retailing
has placed heavy demand on e-commerce and third-party logistics customers. At the same time, the GDP growth outlook
is rising under new policies from the Abe administration.
Tight market conditions are establishing rent growth momentum for modern facilities. Speculative construction has
drawn solid pre-leasing. In the fourth quarter of 2012, vacancy rates for large modern facilities fell to 3.7% in Tokyo
and 1.5% in Osaka, leading to upward pressure on rents.
While supply deliveries are expected to be above average in
2013 in Tokyo and in 2014 in Osaka, most new projects are
pre-leased and are not expected to reduce market occupancies or rents. As shown in Exhibit 4, Tokyo and Osaka are the
strongest markets in Japan, whereas regional markets, such
as Fukuoka, Nagoya, and Sendai, are also expanding but at
a less brisk pace. The potential for rent growth is strongest in
the global markets, and the elevated demand backlog warrants further development.
Asset values appear poised to rise higher. Investor demand
for logistics facilities is likely to benefit from renewed expectations for higher economic growth and inflation. Increased
investor demand has been evident in the recent spate of
successful public offerings of Japanese REITs, including the
Nippon Prologis REIT. Demand has been strong from domestic and international investors alike. However, a split in
the market has emerged, with a divergence between strong
momentum for modern facilities and weaker velocity for
The rise of a modern supply chain is central to logistics demand in China. The growing consumption of China’s 1.3 billion people requires ongoing investment in a modern supply
chain backbone—of which industrial real estate is an integral
part. The country is experiencing a surge of its middle class,
highlighted by rising affluence and consumption after a decade of an economic structure dominated by export demand
and government investment. Retail sales growth has been tremendous, growing 80% during the past four years, based on
data from the National Bureau of Statistics of China.
The logistics markets remain extremely constrained. Development has not kept pace with the ongoing growth of
consumers and businesses. The gradual release of land for
industrial development has kept supply tight. New demand
is expected to continue to outstrip new supply in the coming
years. The occupancy rate remains approximately 95%, supporting market rent growth on the order of 5% to 7% annually
in global markets. As shown in Exhibit 4, Shanghai and Beijing
are among the strongest Chinese markets, but additional global
(Guangzhou and Chengdu) and regional (Tianjin and Dalian)
markets are expanding and require more development.
Property performance has attracted significant interest;
cap rates are approaching historical lows. Rent growth has
run above the pace of inflation for the past several years, attracting significant investor interest. Cap rates have dropped
below 7% in global markets. Going forward, return outperformance will increasingly need to be driven by rental growth
and cost controls, as further cap rate declines require testing
historically low levels.
Exhibit 4: Asian Property Market Cycles