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The Future of Real Estate: Shaped by People, Technology and the Environment


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CONTENTS 1. EXECUTIVE SUMMARY

4

2. OFFICE

9

3. RETAIL

19

4. LOGISTICS

26

5. HOTEL

37

6. DATA CENTER

46

7. INVESTMENT

60

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1. E X E C U T I V E S U M M A R Y

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EXECUTIVE

SUMMARY

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Summary As we enter 2020, it is an appropriate time to consider how the Japan real estate market will change over the next 10 years. General changes in society will include shifting demographics, environmental issues, and the further evolution of technology. These phenomena are also likely to drive change in the real estate market. On the demographic front, generations including millennials and Generation Z will comprise the core of society by 2030, while the overall population will continue to age. Environmental challenges are no longer a matter for the future; they are already impacting directly on people's lives and corporate activity, and are something that the real estate sector must also tackle head-on over the next decade and beyond. As well as helping to resolve these issues, technology is set to bring new possibilities and create fresh opportunities for real estate. This report by CBRE examines the office, logistics, retail, hotel and data center sectors, as well as the real estate investment market, from three perspectives: People, the Environment, and Technology.

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EXECUTIVE

SUMMARY

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Office In the past, employees have had to adapt to offices. In the future, however, offices needed to be adapted to suit employees. The next decade will see the greater geographic dispersion of offices across the metropolis. Three factors are driving this trend: (1) increased diversity in demographics and number of generations of office workers in the workplace; (2) infrastructure development plans in Tokyo over the next 10 years; and (3) the further spread of technology that allows for more effective communication with remote locations. The spread of Artificial Intelligence (AI) and Internet of Things (IoT) should also help to realise optimal office environments for individuals. For landlords, it seems likely that their primary clients will no longer be tenant companies, but individual office employees. Growing interest in sustainability is set to ensure that tenants will place greater importance upon a building's environmental performance when considering leasing options. The shift in environmental awareness among office users also suggests that for the owners of office buildings, consideration for the environment could eventually result in higher revenues.

Retail The rise of "green consumers" is likely to drive change in the way retailers select stores. Strong environmental performance will be a added value and a competitive edge for a store, which could boost its rent levels. With e-commerce is continuing to grow at a rapid pace, there are questions about the need for physical stores. However, CBRE believes that brick-and-mortar stores will continue to evolve in the coming years. In fact, evolution is essential if physical stores are going to survive and flourish in the future. The factors driving the evolution of physical stores include the following: the decreasing population; an ageing society; a shifting customer base (and shift in their values) driven by millennials and Generation Z; and technology. Store network reorganisation is likely to intensify in the coming years as retailers merge or form alliances. Factors such as the provision of high value-added products and services, and the enhancement of entertainment elements, will also become increasingly important in the management of physical stores. Some retailers are already using Virtual Reality (VR) and Augmented Reality (AR) to enable customers to try on clothes or test-drive cars as part of a general shift towards offering stronger entertainment and experiential elements. The introduction of Mixed Reality (MR) will also significantly affect the strategies of physical stores. The evolution of technology will also drive change in marketing strategies and approaches. Following the advent of omni-channel strategies in recent years, the spread of "unified commerce" in the coming decade is likely to boost purchasing rates. 6


EXECUTIVE

SUMMARY

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Logistics Along with the growth of e-commerce, demand for state-of-the-art logistics facilities is expected to increase. In particular, the rising participation of women in the workforce and Japan’s ageing society are set to drive an increase in home delivery of food products. As well as an increase in cold storage warehouses, we may also see the emergence of warehouses housing centralised kitchens for home food delivery. As home delivery of fresh food gains popularity, it is likely to become even more important for warehouses to be located close to where consumers live. This is set to result in increased demand for last-mile warehouses located close to residential areas, even if they are only small in scale. Meanwhile, in places located some distance from the city centre or from residential areas or the consumer, cutting-edge logistics centres incorporating robots and automation equipment are likely to become more common, benefiting from their larger scale and relatively lower rent levels. CBRE estimates that warehouses aged 50 years or over will make up over 30% of all warehouses in Tokyo in 2030. Up until now, strong demand has ensured that even obsolete facilities have continued to attract tenants. However, heightened environmental awareness is likely to promote the redevelopment of ageing warehouses in the coming years. Additionally, more occupiers are looking to enhance their Environmental, Social and Governance (ESG) rating, suggesting that as well as the age of a logistics facility, environmental performance will be a key factor determining its ability to attract tenants.

Hotels While there are concerns about the present large volume of new hotel supply in the pipeline, there will be little risk of oversupply over the next decade. Existing hotel stock will be insufficient to meet the anticipated expansion of inbound demand over the medium- to long-term, either in quantity or quality. The increasing use of technology should help to address concerns about the labour shortage currently affecting the hospitality sector. If the savings in manpower are allocated to providing guests with service of higher quality, customer satisfaction will improve, and this in turn should boost revenue per available room (RevPAR). Greater diversity in the nationality and preferences of guests is also likely to affect the selection of hotels. If hotels are scored on their environmental initiatives, or an international system of environmental accreditation for hotels becomes more recognised, this could become a new criterion for hotel selection.

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EXECUTIVE

SUMMARY

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Data centers The spread of AI and IoT, and the increased use of big data, have led to a surge in data traffic in Japan. Over the next decade, the data centers supporting this traffic are likely to become essential infrastructure, akin to power, gas, water, and public transport. However, it takes around three to five years to develop a data center, meaning that there could well be a shortage of this asset class in future. This means that as well as new development, conversion and re-use of existing buildings will become an option. The specifications required for data centers will also become increasingly sophisticated. This means that the funds required for development and upgrade of facilities will also increase. In the coming years, CBRE expects to see more cases of co-investment with partners and the use of real estate funds. Further separation of ownership and management will encourage more capital to target data centers for investment. Data centers use far more energy than other major asset types. Consequently, environmental measures will be essential in the development of future data centers, including energy saving and the use of renewable energy. In fact, “green data centers� could be even better suited to ESG investment in comparison with other asset types due to their sustainable development and operation.

Investment Demand for investment in real estate, which offers the prospect of relatively higher yields and stable income compared with other financial products, is likely to grow further over the next decade as Japan cements its status as an attractive destination for institutional investors' long-term funds, including pensions. CBRE expects that almost all asset types will become "operational assets". Even a core asset such as an office could see significant fluctuations in cash flow depending on whether its owner can respond flexibly to tenants' needs. As a result, the importance of asset management in real estate investment will increase steadily. Moreover, with the increasing professionalisation of real estate investment, we may see more cases of non-real estate companies selling the buildings they own, a trend which should also help to improve liquidity in the real estate investment market.

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2. O F F I C E

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OFFICE

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2.1 People Further diversification of office workers

Figure 1: Outlook for the working age population in Tokyo

Retirement age could be raised to 70 by 2030

65-69 years old population

Japan‘s total working age population (15–64 years) is forecast to fall by 7% between 2020 and 2030*1. However, as the population is likely to remain concentrated in urban areas, the working age population in Tokyo is forecast to remain largely unchanged (Figure 1). In fact, the number of office workers could increase marginally in Tokyo, since by 2030 the retirement age will have been raised. The Revised Act on Stabilisation of Employment of Elderly Persons enforced in 2013 made it compulsory, in stages, for companies to employ all those who wish to remain working to the age of 65. At the same time, some companies are reportedly considering a retirement age of 70 in the light of the increasing difficulty in hiring workers. Assuming the retirement age is raised to 70 by the year 2030, the working age population in Tokyo will increase by 8% compared with 2020. This would mean further generational diversity among office workers, because, in the period to 2030, the so-called "post-Z generation" born between 2011 and 2015 will have joined the population of office workers, and some of the "baby boomers" born between 1946 and 1965 will still be employed in offices in 2030 (Figure 2).

Figure 2: Breakdown of the Tokyo working age population by generation (2015 and 2030) Generation Z 15-19 yeasr old 2015

6%

30% Post Generation Z 15-19 yeasr old

2030

6%

2030: If the retirement age is extended to 70

6%

Millennials 20-34 yeasr old

29%

Generation X 35-49 yeasr old

37% Generation Z 20-34 yeasr old

Millennials 35-49 yeasr old

Baby Boomers 50-64 yeasr old

15-64 years old population Thousand people

Labor population growth rate (compared to 2015) Labor population growth rate (compared to 2020)

10,000

10%

8,000

8%

6,000

6%

4,000

4%

2,000

2%

27% Generation X 50-64 yeasr old

30%

Baby Boomers 65-69 yeasr old

35% 0

26%

28%

32%

8%

Source:National Institute of Population and Social Security Research, “Japan's estimated future population by region (Estimated in 2018)”, CBRE, March 2018

0%

2015

2020

2030

Source: National Institute of Population and Social Security Research, “Japan's estimated future population by region (Estimated in 2018)”, CBRE, March 2018

*1 National Institute of Population and Social Security Research "Regional Population Projections for Japan (2018)"

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Companies wishing to secure and retain the necessary personnel in the coming years will need to accept a greater diversity of human resources. This will require building an environment in which a variety of work styles are possible. Up until now, importance has been given to the following factors when selecting an office: enhancing the company’s status, operating efficiency, and costs (Figure 3). Employees' work styles were then required to align with the chosen office. However, going forward, it will become increasingly necessary for offices to accommodate the needs of employees. In fact, this trend has already been seen at many companies in recent years. In CBRE's "Occupier Intentions Survey on the Use of Offices", the response rates for "priority on personnel recruitment" and "comfort" had risen compared with 2015, and the selection criteria for offices had shifted from a focus on the "hard" building aspects to giving greater weight to employees' work styles (Figure 4).

2018

pts of change(RHS)

+10

80%

10 5

+3

60%

0

40%

0 -3

-5 -9

20%

-12

-10

-12

0%

Source: CBRE, August 2019

Cost

Building grade

Location

-15 Earthqake resistance

From the perspective of stemming the decline in the number of workers, there is still scope to increase the participation rate of women in the workforce, depending on government policy and the approach adopted by companies. To be fair, the labour force participation rate of women aged 25–29 in Japan is 81.5%, higher than 78.2% in Europe and the U.S.. However, the rate for the 30–34 and 35–39 age groups is 73% and 72%, respectively, lower than 73.6% / 74.1% in the U.S., and 79.0% / 77.8% in the UK*2.

100%

Transportation accessibility

The awareness of work-life balance is especially strong among millennials compared with the preceding generations. In a survey of Japanese millennials conducted by CBRE in 2015, 74% of respondents said they were concerned about lengthy commuting times. In addition, "Generation Z", which is the generation following millennials, has grown up in the midst of economic and social change, along with rapid advances in technology. It is said that Generation Z tends to be more pragmatic and independent-minded than other generations, and places more importance on getting work done, rather than on the formality in which it is done. In addition, the growing number of dual income families and ongoing population ageing means that the division between home (housework, childcare, nursing care, etc.) and work will become an increasingly important issue for individuals.

(multiple-answer format) 2015

Comfortability

Greater diversity among office workers will alter the selection criteria for offices

Figure 3: Focal points when relocating office

Advantageous for hiring new talent

People

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Figure 4: Reasons for workplace change Accommodate varied work styles

2018

2017

52%

Improve productivity

68%

Improve employee satisfaction

56% 62%

26%

Promote employee community

41% 36% 40% 45%

Promote innovation and creative culture 0%

68%

20%

40%

60%

80%

Source: CBRE, August 2019 *2 As of 2016 (Japan Institute for Labour Policy and Training)

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People Worker-focused office selection driving the geographic dispersion of office sites As shown in Figure 5, previous years have seen a significant gap between the area where the population was concentrated (= the residential population) and where employees were concentrated. While employee numbers are concentrated within a 10 km-radius of Tokyo Station, residents are concentrated within the outer area, beyond a 10 km radius. If the millennial generation, who wish to live close to their place of work, and the child-rearing generation and elderly, who need to live close to their place of work, are to be actively accepted in the workforce, more companies are likely to consider how this area disparity can be narrowed. It is possible that a strategy of geographic dispersion will become the norm – for example, siting only certain headquarter or administrative functions in the city centre, while locating sales bases and the like as satellite offices close to residential areas or using coworking offices. Several major new infrastructure schemes are scheduled to be completed in Greater Tokyo in the years to 2030 (Figure 6). Such projects should also encourage the dispersion of office sites.

Figure 5: Population and number of employees in commercial zones radiating out from Tokyo Station Million People 5

Number of employees (Current)

Population (Current)

Population (2030)

Omiya

4

Matsudo

3

Nishifunabashi Tokyo

Mitaka Hachioji

2

Shinjuku

Chiba

Kawasaki 1

Yokohama

0 - 5km

5 - 10km

10 - 15km

15 - 20km

20 - 25km

25 - 30km

30 - 35km

35 - 40km

Source:Statistics Bureau, Ministry of Internal Affairs and Communications, “Economic Census FY2014”, National Institute of Population and Social Security Research, “Japan's estimated future population by region (Estimated in 2018)”, CBRE, March 2018

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People Infrastructure supporting the dispersion of office sites Figure 6:Infrastructure development in Tokyo

Haneda access line Nishi Yamate Route

Keiyo line extension/ Chuo line quadruple track

Central direct connection line

Undecided

2029

Name

Undecided

2nd half of FY2022

Root loop 2

2022

Linear Shinkansen

2027

Haneda access line

2029

Shinagawa Metro (Shirokane takanawa to Shinagawa)

Undecided

Central direct connection line (Oshiage to Sengakuji)

Undecided

Keiyo line extension/ Chuo line quadruple track

Undecided

Tokaido freight branch line combined use

Undecided

Undecided

Branch line of Yurakucho Line extension (Toyosu to Sumiyoshi)

Undecided

To Haneda Airport

Oedo Line extension (Hikarigaoka to to Higashitokorozawa)

Undecided

Haneda access line Higashi Yamate Route

Hibiya Line New Station "Toranomon Hills" Hamamatsucho Harumi 2020

Sengakuj i Linear Shinkansen

2027

Shinaga wa

Yamanote Line New Station "Takanawa Gateway" 2020

Shinagawa Metro

Undecided

June 2020

Sotetsu Line / Tokyu Direct Line (Hazawa Yokohamakokudai to Hiyoshi)

Sumiyoshi

Toranomon

Shirogane -takanawa

November 2019

Spring 2020: Provisional opening FY 2024: Opening

Tokyo

Shibuya

Opening period

Yamanote Line New Station "Takanawa Gateway"

Sotobori Ave.

Shinjuku

To Narita Airport

Oshiage

Sotetsu / JR Direct Line (Hazawa Yokohamakokudai to Miusashikosugi/for Shinjuku) Hibiya Line New Station "Toranomon Hills"

2029

Branch line of Yurakucho Line extension

Undecided

Root loop 2 2022

Shinkiba

Toyosu Ariake New Subway

Undecided

Tokaido freight branch line combined use

Haneda access line Seaside Route

2029

Note: Including commercialisation which has not been officially decided. Source: CBRE, November 2019

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2.2 Technology Technology will also enhance workplace dispersion By 2030, the spread of 5G, and subsequently 6G, is set to further boost communication speeds and data volumes. This will allow smoother communication with remote locations, which in turn should also promote the geographic dispersion of offices. Office workers no longer tied to desks: The introduction of activity-based working (ABW), whereby employees can select their optimal location according to their work activity, will become common. Office workers no longer tied to offices: The evolution of communications tools will lower the barriers to using satellite offices and coworking. It will become normal for employees to work in the optimal location for the work they need to perform that day. With the promotion of remote working, including home-based working, it should also become easier for employees to balance work with childcare and nursing care.

Spread of AI and Internet of Things (IoT) in the workplace As offices become smarter, various functions that support workers' comfort, convenience, and safety will become automated. For example, optimal configuration of lighting and air-conditioning, concierge functions, biometric authentication and database access controls for security, etc. The storing of activity data for all office workers in the cloud, and its analysis using AI, will suggest the optimal office layout and options for group or project member compositions. This should facilitate the creation of flexible workplaces tailored to the business environment, as well as optimal combinations of skills and talent. With the spread of these technologies, systems and facilities will be established that can flexibly address tenant requirements. This will allow companies to provide in-office services to their own employees. For building owners, it seems likely that their primary clients will no longer be the tenant companies, but instead individual office employees.

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Technology Technology bringing about greater flexibility of work location High-speed networks, Wi-Fi, smartphones, and notebook PCs have transformed desk-based work. There has been a reduction in simple manual tasks, and the weight of areas such as planning, adjustment, and sales has increased. In addition, it has become necessary for one person to carry out multiple tasks, rather than doing the same task all day, and this has brought about changes in work style, such as free address working and ABW. In the coming years, there will be disruption not only to the content of work activities, but also to the work location. Offices are becoming geographically dispersed due to the preferred work styles and needs of employees, as well as the evolution of technology. CBRE expects to see the spread of teleworking, an increase in satellite offices, and greater use of coworking spaces in the coming years. Assuming that this happens, a company's headquarter functions will likely be network-based, rather than being focused on a physical location.

T E CHNOLOGY

Satellite office network Cafe

Home

D I S R U PTI O N

D I S R U PTI O N

Project office

Headquarters as a network

CafĂŠ / Gym membership Office

Meeting On-demand Flexible space

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2.3 Environment The environmental role of office buildings The number of companies signing up to the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015 is increasing, and interest among Japanese companies in sustainability has risen dramatically. When a company selects an office building in future, a higher priority will be given to the building's environmental performance. Following its ratification of the Paris Agreement, Japan is targeting a 26% reduction in CO2 by 2030 compared with 2013. Additionally, in the “Other business” segment which includes real estate, the 2030 target is for a 40% reduction compared with 2013*3. Looking at current energy consumption in Japan by segment, the real estate sector accounts for 16% of the total (Figure 7). In addition, the share of offices and buildings CO2 within the real estate sector is 22% emissions (Figure 8). With new construction and development continuing in Tokyo, office buildings have a considerable role to play in reducing.

Figure 8: Breakdown of energy consumption in the "Other business" (commercial real estate) segment (FY2017)

Figure 7: Trends in final energy consumption Transportation Household Companies / Officies Manufacturing Companies / Officies Agriculture, forestry and fisheries mining construction Companies / Officies Business and others (Commercial real estate) Ratio of business and others (Commercial real estate)(RHS)

PJ 18,000

30% 25%

15,000

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0% 1999

0 1998

5% 1997

3,000 1996

10%

1995

6,000

1994

15%

1993

9,000

1992

20%

1991

12,000

1990

Department Store

Theater / Amusement

Source: Compiled by CBRE based on The Institute of Energy Economics, Japan "Energy Economics Statistics Summary", Agency for Natural Resources and Energy "General Energy Statistics", November 2019

3%

1%

Restaurant

8%

School

Office/Building

22%

9%

Hotel

10% Hospital

11%

Wholesale / Retail Other Services

20%

16%

Source: Compiled by CBRE based on The Institute of Energy Economics, Japan "Energy Economics Statistics Summary", Agency for Natural Resources and Energy "General Energy Statistics", November 2019

*3:Ministry of the Environment Government of Japan ”Japan‘s INDC”, CBRE, July 2015

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Environment

Investors are also seeing increased opportunities for Environmental, Social and Governance (ESG) investing. In Japan, the commencement of ESG investing by the Government Pension Investment Fund (GPIF) in 2017 has prompted other investors to follow suit. According to 2018 statistics provided by the GSIR (Global Sustainable Investment Alliance), global ESG investing totalled around US$ 30 trillion in 2018, a rise of 34% in just two years, compared with US$ 2 trillion in Japan. Although the figure for Japan is relatively low, ESG investing increased 4.5-fold over the same period. In comparison, the U.S. recorded a 38% increase in ESG investing over the same period to US$ 12 trillion, while Europe registered a17% increase to US$ 14 trillion.

200 150 100 50

2019

2018

2017

2016

2015

2014

2013

2012

0 2011

Other environmental certification systems in Japan include CASBEE (Comprehensive Assessment System for Built Environment Efficiency) and DBJ Green Building, and in both cases the number of certified buildings is steadily rising. As well as being environmentally friendly, such green buildings bring benefits such as lower utility costs and improved comfort and quality of life for workers.

250

2010

The number of buildings obtaining environmental certification is increasing. As of October 2019, 69,066 buildings in the U.S. were registered with LEED (Leadership in Energy and Environmental Design), the most widely used environmental performance evaluation system for buildings in the world, far more than in other countries. In Japan, only 245 buildings are registered, still a low figure compared to other countries, although this number is steadily rising (Figure 9). Looking at the breakdown of buildings by asset type in Japan, offices have the highest share at 43%, followed by retail (17%), and logistics facilities (7%) (Figure 10).

Figure 9: Number of LEED-certified buildings in Japan

2009

Growing number of green buildings

Source: U.S. Green Building Council, CBRE, October 2019

Figure 10: LEED registered asset types in Japan

Recent years have seen J-REITs issuing green bonds. Among office-specialised J-REITs, Invesco Office J-REIT, Kenedix Office, Japan Excellent, and Japan Real Estate have issued green bonds so far, for acquiring assets with green building certification. Growing demand for ESG investing is likely to promote further expansion in demand for green buildings in the coming years.

Source: U.S. Green Building Council, CBRE, October 2019

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Environment Rising value of green buildings Companies have traditionally regarded environmental measures as being negative for profitability, due to increased costs and other factors. However, recent years have seen a shift in the view towards sustainability initiatives, and a growing belief that they can actually be positive for a company over the longer term. Surveys also suggest that environmental measures can enhance the profitability of office buildings. According to a survey by the Ministry of Land, Infrastructure, Transport and Tourism concerning the value attached to office buildings with excellent environmental performance, comfort and wellbeing, around 70% of tenant respondents and 80% of building owner respondents said that the value of real estate had risen or would rise in future as a result of ESG initiatives (Figure 11). In addition, the rental premium for ESG real estate was said to be "4%–6%" by the majority of tenants/owners, with 7% of all respondents answering "more than 10%". (Figure 12)

Figure 11: The value of ESG real estate (single-answer format)

60%

Real estate value will increase Real estate value has not yet increased much, but it will increase Real estate value will not increase Real estate value will be lower Unknown

Figure 12: Allowable rate of increase in rent for ESG real estate (single-answer format) 0%

2~4%

4~6%

6~8%

8~10%

More than 10%

Others

30%

50%

25%

40%

20%

30%

15%

20%

10%

10%

5%

0%

0~2%

0% All

Occupiers

Source:Ministry of Land、Infrastructure and Transport, 2019

Investors and Owners

All

Occupiers

Investors and Owners

Source:Ministry of Land、Infrastructure and Transport, 2019

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3. R E T A I L

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3.1 Environment Environmental sustainability will be a differentiating factor By 2030, it is estimated that the global population at risk from flooding will double*1 and 70-90% of the world's coral habitat will be lost as a result of the Earth's average temperature rising to 1.5 ℃ above its pre-Industrial Revolution levels*2. Many firms will be striving to reach a new set of United Nations Sustainable Development Goals (SDGs)*3 the current batch of which expire in 2030, while also confronting a broad range of environmental challenges. Companies will also need to respond to a steady increase in "green consumers*4 as more shoppers base their choices of brands, products, food and services on the concept of ethical consumption*5. In these circumstances, Tokyo’s high-street retail markets could experience the scenarios outlined below.  An increasing number of brands are likely to select more environmentally friendly properties when opening stores. Landlords’ approach to environmental sustainability (e.g. use of renewable energy or designing properties with less environmental impact) is also likely to be an important factor influencing property selection by retailers. As brands' requirements for new stores become focused on the added value provided by environmentally friendly buildings, rents in such buildings could rise relative to other facilities.  Many brands currently operating stand-alone stores on Tokyo's main shopping streets are likely to start appealing to consumers by creating safer working environments and differentiating themselves with more environmentally conscious products. Examples include brands that have started to use a business model based on the circular economy*6 or brands whose products incorporate environmentally friendly features in their basic functionality.  More stores will be opened by brands originating in developing countries and by retailers selling fair trade*7 products. However, these brands are likely to locate most of their in secondary areas as they will not be able to afford very high rents. *1 Compared to 1976-2005 *2 Special Report on Global Warming by the UN’s Intergovernmental Panel on Climate Change (IPCC) *3 The UN summit in 2015 adopted the previous sustainable development goals unchanged *4 Consumers who think about the environment and/or buy more environmentally friendly products

*6 The circular economy gets maximum use out of products, parts and resources, and continues to reuse and recycle them without reducing their value *7 A movement that aims to improve the lives and independence of producers and workers in developing countries by continuing to buy resources and products from developing countries at a fair price

*5 Consumption that is considerate towards other people, society and the environment

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3.2 Population and Values Role of flagship stores will focus on branding and promotion Japan's total population is forecast to shrink by around 8% from 126 million in 2019 to 116 million in 2030*8. The proportion of the population over the age of 65 will rise from 27.7% in 2019 to 31.1% (37.15 million) in 2030. Although annual retail sales in 2018 rose by 1.7% y-o-y to JPY 144.965 trillion - the second consecutive annual increase - retail sales are forecast to trend downwards in the coming years due to the declining population. Meanwhile, by 2030, millennials*9 and the generation after them, Generation Z*10, will be aged between 21 and 40, giving them a key role in consumption. In these circumstances, Tokyo's core retail submarkets could experience the scenarios outlined below. â—? As retail sales decline along with Japan's shrinking population, competition for customers among retailers is likely to intensify. In sectors where it is hard to differentiate products, there could be more mergers and alliances*11 established between retailers. If so, more retailers may consider restructuring their existing store network, which would result in more churn among store tenants. Although the number of retail stores in Japan is expected to fall by 2030, retailers are still likely to open new stores in the main shopping areas that are popular for flagship stores for branding purposes and in order to promote products. ď Ź While the automation of functions such as inventory management and checkout will become even more critical to mitigate the labour shortage, retailers will also need to improve customer satisfaction through their contact with sales staff to maintain and improve their competitiveness. CBRE also anticipates rising demand for multi-lingual staff to improve customer satisfaction among inbound tourists, whose numbers are set to continue to rise. Consequently, some retailers are likely to restructure their store networks by locating flagship stores with the most able sales staff in the main shopping areas for the sake of branding and to promote products, and situating highly automated high-turnover smaller stores in more convenient locations, such as around railway stations.

*8

Estimate by the National Institute of Population and Social Security Research (March 2018)

*10 Young people born between 1995 and 2010 and now aged between 10 and 24

*9

Young adults born between 1990 and 1994 and now aged between 25 and 29

*11 Tie-ups between companies

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Population and Values More demand for added value products and services

Figure 1ďźšMain trends in consumer awareness

ď Ź In order to prevent the declining population from negatively impacting sales, more retailers are likely to try to increase the average spend per customer by offering products and services with even more added value. At present, customer are willing to pay for the added value that appeals to them (Figure 1)*12. They also tend to give greater weight to convenience than to price. These attitudes mean that there is likely to be more co-retailing in brick and mortar stores. Co-retailing involves two or more retailers sharing a single space to provide goods or services and thus aims to achieve synergies through collaboration between multiple brands. An example would be collaboration between different retail sectors or brands, such as a luxury brand collaborating with a casual fashion brand. This sort of collaboration is likely to encourage consumers to visit brick and mortar stores as it can offer them new shopping experiences. Such an approach also enables retailers to operate stores in high street locations while keeping rental costs under control. ď Ź By 2030, elderly consumers will be an important customer demographic for retailers in Japan. The increasing number of elderly still in work will mean more elderly customers with a stable income other than their pension, while elderly consumers will also be highly mobile, thanks to the advent of autonomous vehicles and Mobility as a Service (MaaS)*13. According to a survey to elderly people carried out in 2016 by the Hakuhodo Institute of Life & Living*14, the proportion of respondents saying "I would like to go to a restaurant or bar on my own" was 37.4%, up 8.3 percentage points from 29.1% in the previous survey (in 2006). There may also be an increase in the number of stores targeting elderly consumers, especially in areas such as Ginza, which is known as an area for adults.

Source: NRI, CBRE

*12 Nomura Research Institute, "Changes in Japanese consumers' values and shopping habits seen in a 10,000person survey: key results from the 8th survey" (November 2018) *13 Mobility as a service. A concept for mobility that subsumes all means of transport other than private cars into a

single service, using ICT (information and communications technology) to manage transport as a cloud *14 A survey of 60 to 74 year-olds, conducted from 24 February to 22 March 2016

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Population and Values  Millennials and Generation Z consumers regularly look at e-commerce websites and social media, taking time to compare products before they buy, but tend to make a purchase only after trying the actual product in a physical store)*15 as they are averse to making the wrong choice. However, the advent of 5G*16 is forecast to make even more products and services available on e-commerce websites. There is likely to be further research on, for example, the Tactile Internet*17 and interfaces*18 that allow users to experience taste and smell. Consequently, it will be even more important for brick and mortar stores to have an Offline to Online (O2O)*19 strategy to attract millennials and Generation Z by making shopping more entertainment-based.

*15 “A Study of Young People’s Shopping Habits – Younger Generations’ Awareness of Omni-channel Retailing and their Behaviour” conducted between 24 February and 22 March 2016 among students and freelance workers aged between 18 and 23 and living in the Tokyo Region *16 A general term for communication systems and mobile handsets using the next generation of mobile communications, ranked as superior to the current latest model 4G (4th generation mobile phones) or 4G LTE

*17 The capability to experience a remote object as if it were in front of you *18 Standards and specifications for connecting computers to peripheral equipment *19 Means for encouraging visits to bricks and mortar stores and related purchases using online information and services, such as online shopping sites and social media

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3.3 Technology Evolution of brick and mortar stores through tech innovation Recent years have seen the advent of new technologies, such as e-commerce and social media, that have caused structural change to retail formats or brought about a major shift in consumers' shopping habits. The use of contactless payments and self-service checkouts, along with other innovations that streamline the operation of stores or bring greater convenience for consumers, is becoming widespread. Brick and mortar stores are also likely to evolve in the coming years thanks to further technological innovation. In these circumstances, Tokyo's core retail submarkets could experience the scenarios outlined below. â—? Some retailers are already implementing Virtual Reality (VR) and Augmented Reality (AR) to let customers try out products or to provide more entertaining services. By 2030, the use of Mixed Reality (MR)*20, which could reduce the need to fit-out physical stores or hold inventory of physical goods, could also become common. MR will allow customers wearing smart glasses or goggles to experience brands' view of the world and their actual products in the form of digital images while walking around inside a store. So far, very few companies have stated that capabilities such as VR or AR have themselves led to an increase in sales. This seems to be because when customers try on new makeup or apparel, current technology is not capable of helping them judge for themselves whether it suits them. In future, retailers will need to establish ways to increase customer engagement*21 by tying technology into their contact with sales staff and building technology into consumers' purchasing processes.

*20 Allowing smart glasses or other devices to capture the shape of a room, the position of furniture in it or other aspects of the real world and overlaying these with digital images

*21 A deep engagement by consumers with products, brands and retailers

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Technology AI forecasting consumer needs and preferences â—? One marketing method that is likely to come after omni-channel*22 strategies is "unified commerce." Unified commerce centralises customer information, such as their past online and in-store purchases, products they have tried and products they have searched for on their smartphone or computer, and uses artificial intelligence to predict consumers' needs and preferences. This makes it easy to personalise the range of products suggested or offered and should therefore enable retailers to achieve higher sales by recommending them to stock up in store on products that have been bought online or by displaying pop-up ads based on measurements obtained in-store in order to encourage purchases.

� Landlords of brick and mortar stores are also likely to utilise technology to a greater extent in 2030 than they do now. For example, landlords will need to visualise customers' in-store activity using image analysis or heat maps in order to attract tenants. There is also likely to be increasing use of Internet of Things (IoT) to enable more efficient store management and effective store layouts. In future, it may be possible to automatically adjust the partitioning of the shop floor according to the number of customers coming into the store, and to use customer behaviour and sales data to move the location of products, change the direction of air conditioning and control the brightness of lighting. As this technology and equipment becomes available, stores will become more agile and flexible. *22 A marketing strategy for retailers announced in 2011 by the US department store Macy’s. Providing the optimal shopping environment and experience in stores, apps and all points of contact with customers

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4. L O G I S T I C S

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4.1 E-commerce E-commerce growth will continue to drive demand for new logistics facilities E-commerce utilisation rate continues to rise The size of Japan's consumer e-commerce market reached almost JPY 18 trillion in 2018, with the e-commerce ratio (the share of e-commerce sales as a proportion of total retail sales) increasing to 6.2% (Figure 1). In the U.S., e-commerce sales totalled US$ 523.3 billion*1 in 2018 (approx. JPY 57 trillion), making it 3.2 times larger than the Japanese e-commerce market, and giving it an e-commerce ratio of 9.7%. Since 2008, growth of the Japanese e-commerce market has averaged around 12% per annum, although in 2018 the growth rate was 9%. The Japanese ecommerce market is expected to continue to expand at an annual rate of 9ďź…, and assuming flat growth in the total value of retail sales, e-commerce sales are likely to reach JPY 50 trillion in 2030, with an e-commerce ratio of 17%. The e-commerce ratio in the UK is estimated to have been 18.0% in 2018*2, and it is not inconceivable that Japan could also reach such a figure.

Figure 1: Japan EC market

Figure 2: EC market size by country

0

Source: Ministry of Economy, Trade and Industry, May 2019.

Source: eMarketer, Ministry of Economy, Trade and Industry, May 2019.

*1 Retail Indicators Branch, U.S. Census Bureau, Mar 2019

*2 Office for National Statistics, Jan 2019

Brasil

20%

India

600

Canada

40%

France

2018

2017

2016

2015

2014

0%

2013

0

2012

5%

2011

5,000

2010

10%

2009

10,000

1,200

Germany

15%

Growth 60%

Korea

15,000

2017

1,800

UK

20%

U.S.

20,000

2008

2018

billion US$

Japan

Growth

China

Japan EC Market

billions JPY

0%

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4.1 E-commerce Sustained market growth drives demand for new logistics facilities E-commerce growth translates into growth for logistics facilities Japan has always seen a low level of e-commerce sales (Figure 2). The largest e-commerce market in the world is China, where it has been relatively easy for direct sales to penetrate the market due to a sparse network of physical stores. However, in Japan, where retail stores are an established and prominent part of daily life, consumers have not displayed strong demand to purchase goods via mail order or online. In the coming years, however, the e-commerce ratio in Japan is forecast to increase further due to improved options for online shopping and the greater convenience afford by home delivery. A rise in the e-commerce ratio translates directly into demand for logistics facilities. Distribution warehouses for e-commerce require goods to be individually picked and feature a more specialised layout compared with standard warehouses, such as wider aisles and incorporating space for packaging. One factor driving expansion in the logistics facilities market has been the inability for conventional logistics centres serving stores and companies to be jointly used for ecommerce.

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E-commerce Increase in working women and ageing population supports expansion of food e-commerce Figure 3: EC rate by product In 2018, Japan’s working female population had increased by 38% from 1980 and by 12% from the year 2000. The Japanese population also continues to age, with the ratio of those aged 65 years and older expected to rise from 26.6% in 2015 to 31.2% in 2030*. The proportion of people who are unable to allocate sufficient time to daily shopping, or who find it inconvenient, is thus likely to increase in future. By 2030, the process of ordering goods online is likely to be more user-friendly, both for the busy working generation and for the elderly. The ratio of people in their 50s who have a smartphone had risen to 89.7% in 2018 compared with 41.8% in 2014, according to data provided by the Ministry of Economy, Trade & Industry. By 2030, the older population segment will be familiar with using smartphones, meaning that the share of people doing their daily shopping online should also be higher.

Significant scope for growth in food e-commerce Sales of food products (food, drink and alcohol) in supermarkets and convenience stores account for 63ďź… of the total goods sold. However, the e-commerce ratio for food products was just 2.6% in 2018, far lower than the ratio for other product categories, such as 40.8% for office supplies and 13.0% for clothes (Figure 3). Seeing significant growth potential in home delivery of foods, online supermarkets began doing business in Japan around 2014. In 2017, AmazonFresh started home delivery of fresh foods. Rakuten subsequently entered the online grocery business in partnership with Seiyu, while Oisix ra Daichi, which offers home delivery of fresh foods based on a subscription model, has expanded its operations through acquisitions. As well as fresh foods, these services also offer products that are easy to prepare such as meal kits. Over the the next 10 years, ready meal products will also be offered for home delivery together with fresh food. This will require warehouses equipped with cold storage/refrigeration equipment as well as cooking equipment. So called "last mile" delivery networks will become even more important as home delivery of foods increases and becomes commonplace. Source: Ministry of Economy, Trade and Industry *3 National Institute of Population and Social Security Research "Regional Population Projections for Japan (2018)"

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4.2 People Last-mile logistics becomes more important as people live closer to their place of work More people living in city centres close to their place of work Changing demographics in Central Tokyo is one factor underpinning the rise in the volume of goods delivered to the city centre. While the population of Central Tokyo will be higher in 2030, it is expected to rapidly decline thereafter. The population of the five central wards (Chiyoda, Chuo, Minato, Shinjuku, Shibuya), on the other hand, is expected to continue growing in the years to 2045 (Figure 4). Much of the additional population is expected to comprise office workers who put a high premium on work-life balance and live close to their place of work. Therefore, demand for home delivery of daily foods and sundries is also likely to increase.

Figure 4: Estimated population of Tokyo Thousand people

Tokyo

Thousand people

Central 5 wards (RHS)

13,900

1,200

13,800

1,150

13,700

1,100

13,600

1,050

13,500

1,000

13,400

950 2015

2020

2025

2030

2035

2040

2045

Source: National Institute of Population and Social Security Research

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4.2 People The necessity of last-mile logistics E-commerce has always been characterised by a broad range of product items. When fresh foods and ingredients are added to this array of goods, as well as an increase in the total number of products, there is also a greater variety of products, including refrigerated and frozen foods. When it comes to delivery, this wider range of temperature requirements will mean that the time to collection will have to be further shortened. Even if technology evolves, there are limits to how much the delivery time itself can be reduced. For fresh foods, it will be increasingly important for warehouses to be located close to residential areas. The Tokyo 23 wards and the inner part of the Gaikando area should see their value enhanced due to their suitability as sites for last-mile warehouses.

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4.3 Technology Latest technology being utilised in warehouses and for delivery E-commerce warehouses making full use of robotics E-commerce logistics centres require significant manpower due to the need to pick and pack a wide variety of consumer goods. As such, it is in great need of labour-saving technology, as it is especially vulnerable to the severe shortage of workers and soaring personnel costs. It is also a sector that is ideally placed to make use of the latest technologies such as big data and artificial intelligence, as well as robots.

Delivery becoming quicker and more far-reaching Under existing delivery networks, it would be difficult to deliver refrigerated and frozen foods, and meet narrow delivery time slots. However, it is hoped that selfdriving vehicles and delivery robots will be able to make up for the shortage of drivers. With the progression of delivery technology, there should be no longer a need to be concerned about distance and the time required for delivery. Robots and automated systems can operate 24/7, and can even prepare and ship deliveries at night. Warehouses located at a distance from the city centre can benefit from being both larger and having lower rent levels, and this means they could be well placed to become cutting-edge logistics centres that make optimal use of robots.

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4.4 Environment Aging facilities will increasingly lose competitiveness There are still many older warehouses in Central Tokyo. While they remain in active operation, over 30% of these buildings will be more than 50 years old by 2030. The fact that Japan experiences frequent natural disasters, along with heightened environmental awareness, are likely to encourage the rebuilding of warehouses in the coming years.

Concerns about Business Continuity Planning (BCP) measures

Figure 5: Warehouse Construction Started (Nationwide)

Million sq.m. 25

20

Old Earthquake Resistant Standard

15

Recent years have seen Japan suffer a spate of natural disasters. As well as earthquakes, typhoons inflict significant damage across the country on an annual basis. Rain and wind damage to warehouses has also been reported, including damage to shutters and the roof/walls, water infiltration, and damage to stored products. It can take several weeks for facilities to recover from this kind of damage, interrupting the supply chain. Tenants look to disperse their bases geographically, and when selecting a warehouse, they are increasingly raising issues concerning earthquake construction standards and safety.

10

5

0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Largest new supply of warehouses in Japan was recorded in 1971, during the period of economic boom. Many warehouses were also built around Japan in the years preceding and following 1971, and these will be almost 60 years old by 2030 (Figure 5). Based on fixed asset records and building construction statistics, it is estimated that around 33% of warehouses nationwide were built under the old earthquake construction standards.

Source: Ministry of Land, Infrastructure, Transport and Tourism

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Environment Case study: Age of warehouses in Ota-ku In 2012 CBRE conducted research into the year of construction of warehouses and logistics facilities with a floor plate of over 1,000 tsubo in Ota-ku, Tokyo, where there is a concentration of large distribution facilities. The study revealed that 30% of all buildings were constructed before 1980, meaning they will be at least 50 years old in 2030 (Figure 6). In addition, 10% of buildings were constructed before 1970. From a BCP perspective, the coming years will likely see tenants avoid using such buildings that were constructed to the old earthquake standards. Even if their seismic performance has been upgraded, many such properties are not equipped with emergency power facilities or toilets or satellite telephones. There can be no doubt that ageing warehouses are much less competitive overall, particularly with regard to their ability to handle modern logistics work and truck loading/unloading, employee comfort, and convenience.

Figure 6: Percentage of warehouses by building completion year (Ota-ku)

Source: CBRE, November 2019.

*4 Warehouses with a land area over 1,000 tsubo; 2012 survey

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Environment Dramatic increase in importance of environmental performance Environmental performance is now an evaluation criterion for buildings

Figure 7: Number of LEED registrations by countries

The evaluation criteria "Environment", "Social“, and "Governance" have already become a crucial measure of corporate value that companies can no longer ignore. In terms of environmental performance, a building can obtain international recognition by obtaining LEED certification (Leadership in Energy and Environmental Design) as part of the GRESB real estate assessment, a global ESG benchmark for real estate companies and funds*5. The desire to obtain green building certification is particularly strong in the U.S., with 69,066 buildings having obtained LEED certification – by far the highest number worldwide (Figure 7). In Japan, only 245 buildings have registered, with 128 obtaining certification as of October 2019, still a very low figure. Offices account for most of the registered buildings (43%), while only 7% of logistics facilities have registered (17 buildings). This is far fewer than the number of registered logistics facilities in the US (1,613) (Figure 8).

Source: U.S. Green Building Council, Oct 2019

Figure 8: Percentage of LEED registrations by Asset Type in Japan*6

However, spurred on by the recent commencement of full-scale ESG investing by the Japanese Government Pension Investment Fund (GPIF), the need to disclose environmental performance is also likely to increase in Japan. This should also encourage the construction of facilities with high-level environmental performance.

Tenants also adopt a stricter approach Tenants can improve their ESG evaluation by moving into LEED-certified buildings. Among foreignaffiliated firms, environmental performance has long been a requirement when selecting a facility. Facilities with strong environmental performance inherently have benefits for the tenant, including lower electricity costs and enhanced comfort. Therefore, tenants regard them as outstanding facilities of choice in terms of the service they provide, and they tend to be highly competitive. *5 As well as LEED, in Japan CASBEE and DBJ Green Building certification are also used to assess real estate environmental and social performance.

Source: U.S. Green Building Council, Oct 2019

*6 Counts include both registered & certified projects

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Environment Redevelopment of ageing properties into sustainable logistics facilities Logistics facilities in Tokyo are faced with issues including obsolescence, BCP measures, and non-compliance with environmental standards. There is also no new land available for logistics use. However, if a facility can be rebuilt, it can be transformed into a sustainable facility that will remain competitive for another 20 or 30 years. The potential of being located close to the centre of Tokyo can also be maximised to an even greater extent than before. Recent years have seen an increasing number of cases of large warehouses of almost 50 years old being rebuilt within the Tokyo 23 wards (Figure 9). In their development from the early days of the era of high-speed growth through to their position as a logistics gateway, these are all valuable sites with outstanding transportation access. Some regions subsequently saw the development of surrounding residential areas, and these are now prime logistics locations in terms of delivery distance and also commuting convenience for workers. There is no doubt that if relaxation of the floor area ratio can be optimised for more sophisticated use of land, by 2030 there will be several cutting-edge logistics centres within the Tokyo 23 wards, supporting logistics demand and last-mile delivery in this mega-city.

Figure 9: Warehouse Rebuilding Projects (Logistics property for lease) Project name

Area size

1

Distribution B Building

2017

GFA Approx. 171,300㎡

2

Dynabase

2018

GFA Approx. 97,000㎡

3

Tokyo Rail Gate WEST

2020

GFA Approx. 71,800㎡

4

Tokyo Rail Gate EAST

2022

GFA Approx. 161,000㎡

5

Kasai Truck Terminal A Building (Tentative)

2021

GFA Approx. 58,000㎡

6

DPL Koto Fukagawa

2021

Site Area 36,882㎡

7

Distribution A Building Project (Rebuild)

2023

Existing A Building GFA 173,652㎡

2023

Site Area 115,828㎡ (A&B Buildings Amount)

Achievement

Projects

Completion

8 9

Itabashi Truck Teeminal A Building (Tentative) Itabashi Truck Teeminal B Building (Tentative)

2025

Source: Information disclosed by developers and information reported by media and others, compiled by CBRE, November 2019

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5. H O T E L

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HOTEL

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5.1 People

How population concentration in Tokyo and economic growth in neighbouring countries will impact the accommodation market

Figure 1: Relationship between per capita GDP and international tourism departures thousand US$

While the population of Tokyo will still be rising in 2030, the population outside the Greater Tokyo Area (Tokyo, Saitama, Chiba, Kanagawa) – where demand for accommodation among visitors to Tokyo is high – is expected to have reduced from 89.86 million in 2018 to 83.25 million*1 in 2030. This means that fewer domestic travelers will likely be staying in Tokyo in 2030 compared with today. *2.

GDP per capita, nominal, thousand US$

The significance of population concentration in Tokyo 1: Supply is plentiful but not excessive

140

On the other hand, inbound demand looks set to continue growing. Spending on leisure time typically increases as disposable income rises, and so there is a strong correlation between per capita GDP and per capita international tourism departures (= the number of overseas trips per capita) (Figure 1). In particular, the expected increase in per capita GDP and population among Japan's neighbours is likely to lead to an increase in tourists to Japan (Figure 2).

120 100 80 60 40 20 0 0.0

1.0

2.0

3.0

4.0

times / year

Annual number of international departures per person Source: Oxford Economics, UNWTO, CBRE, October 2019 Note: 1995–2017, Worldwide, n=2,180

*1 National Institute of Population and Social Security Research "Regional Population Projections for Japan (2018)" *2 On the other hand, leisure time is likely to increase as a result of work style reform, with more frequent trips

than at present, and so the reduction in accommodation demand could be smaller than envisaged. According to the "Public Opinion Survey on the Life of the People" published by the Cabinet Office (June 2019), when asked what they wanted to do if they had more free time, the majority of respondents (47.7%) said "travel".

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Figure 2: Population and Per capita GDP forecast

People

Source: Oxford Economics, CBRE, October 2019

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HOTEL

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People The significance of population concentration in Tokyo 1: Supply is plentiful but not excessive (cont’d) Can existing hotel stock cope with the rapidly rising share of inbound tourists? The fall in accommodation demand among domestic residents and rise in inbound demand means that the share of inbound demand in Tokyo will increase sharply. Foreign tourists' share of the total number of guest nights in central Tokyo (i.e. inbound demand) was 35% in 2018, second only to Osaka Prefecture (38%)*3. Assuming the government’s target for 2030 is achieved, then this share is estimated*4 to rise to around 50%. Travel to Tokyo by tourists from Asia is expected to increase in the coming years, and 70% of accommodation demand comprises several people staying in a single room, such as "couple/partners", "family/relatives" or "friends"*5. This means that if the share of inbound demand increases, the Double Occupancy Ratio (DOR) should also increase. However, the DOR at Tokyo hotels has been virtually flat in recent years, at 1.4 persons (Figure 3). This suggests that visitors are being obliged to stay in multiple rooms. Since the share of inbound tourists will definitely increase further in future, it is likely to be difficult to satisfy the needs of foreign tourists with existing hotel stock alone. In this sense, the opening of new hotels with large rooms, which is ongoing, is unlikely to result in over-supply. Realignment with business demand, which has mainly targeted existing stock, is thus likely to continue.

Figure 3: Inbound ratio and DOR in Tokyo DOR (RHS)

Inbound ratio

38%

people 1.5

1.41

1.43

1.43

1.43

36%

1.4

35%

34%

33%

32%

1.3

1.2

31% 30%

1.1

30% 28%

1.0 2015

2016

2017

2018

Source: Japan Tourism Agency, CBRE, July 2019

*3

Japan Tourism Agency “Overnight Travel Statistics Survey”

*4 Estimated based on the government’s target for number of inbound visitor nights being achieved. The total number of Japanese guest nights is estimated based on the total number of guest nights by residents from

outside the Tokyo metropolis (actual figures) and "Regional Population Projections for Japan" published by the National Institute of Population and Social Security Research. *5 “Consumption Trend Survey for Foreigners Visiting Japan”, 2018

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People The significance of population concentration in Tokyo 2: Increase in hotels inside large multifunctional developments Expansion in overall real estate demand is promoting advanced use of land The concentration of the population in Tokyo means that the number of people working and living there is increasing. Consequently, both offices and housing should see a growth in the total volume of demand. Additionally, in offices, both the types of worker and work styles are diversifying, and in housing, growth in the number of single-person families is leading to an increase in the number of households. Consequently, the existing stock is unlikely to be sufficient enough to meet this demand, and new stock will likely be needed. Hotels are faced with a similar situation. Inbound demand is growing, and guest preferences are also diversifying. Against this backdrop, new lodging facilities will be needed to accommodate this diversifying demand*6. This means that there will be increased competition with other asset types when acquiring land for development or utilizing land effectively. In order to recover the substantial costs of land acquisition, it will be necessary to increase the ratio of the building portion to generate cash flow, and thereby reduce the financial burden of land per unit area. Alternatively, there will probably be more cases of consortiums, where development plans are drawn up for those asset types where the respective operators have expertise. It is also conceivable that in promoting cooperation among the operators, the boundaries between asset types will become increasingly blurred as the features and elements of other use types are blended. Such moves to lower the financial burden of land per unit area or build consortiums are likely to stimulate expansion in the size of buildings and mixed use. The measures to consolidate blocks of land being promoted by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT)*6,and urban development schemes including easing the floor area ratio (FAR), are likely to accelerate these moves.

*6 MLIT "Guidelines on Superblocks" (March 2011)

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HOTEL

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People The significance of population concentration in Tokyo 2: Increase in hotels inside large multifunctional developments (cont’d) Promoting the supply of upper class and higher grade hotels through building scale expansion and mixed use The larger a building is, the greater its landmark and grade status. Locating the hotel element of a building on the upper floors also provides guest rooms with superior views. The floor area increases as well, providing greater scope for the horizontal expansion of guest rooms. Increasing the number of rooms per floor also streamlines operation (especially housekeeping). Having a mixed-use building also improves guest convenience, enabling them to fulfil different purposes within the same location. There are also benefits for the facilities operator. If there are serviced apartments, banquet and conference facilities, the operator can provide high-level services via the hotel, and the hotel also gains a new income stream, and so there are mutual benefits to be gained from differing use. If, as described above, a larger, mixed-use building enhances hotel guest satisfaction, then this should also contribute to increased earnings for the hotel. The hotel is likely to have a higher grade than the standalone type of limited-service hotels, which have been in plentiful supply hitherto, and it becomes possible to maintain the ADR*7 at a fixed level. This also has the effect of promoting the supply of upper class and higher grade hotels, of which there currently is a shortage (see Figure 4) *8.

Figure 4: Share of 4/5-star hotels in major cities by number of facilities 0%

Macau Singapore Hong Kong Tokyo East Asia Bangkok & Pacific Phuket Taipei Kuala Lumpur Seoul Osaka Bali Pattaya Shenzhen Guangzhou Mumbai South Asia Delhi Dubai Middle East Makkah Palma de Mallorca London Paris Europe & Central Asia Barcelona Milan Prague Istanbul Rome Antalya North America New York

5%

2.1% 0.9% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.4% 0.3% 0.2% 0.1% 0.6% 0.6% 0.0%

4.3%

10%

6.6%

4.8%

3.4% 2.8% 2.3% 1.4% 1.0% 0.9% 0.6% 0.6%

7.0%

9.7%

Source: each Online Travel Agent, Five Star Alliance, CBRE, October 2019 *7 Average Daily Rate. Total sales for all guest rooms divided by the number of rooms sold.

*8 By number, only 0.9% of hotels in Tokyo are 4-star or higher, which is hardly high compared with other major cities.

42


HOTEL

TOKYO

5.2 Technology Greater scope for enhanced earnings Future changes in demographics will require not only larger buildings and more mixed use, but also further efficiencies in hotel operation. Technology will play a significant role in this. Some hotels are already employing the types of technologies listed below.  Streamlining in accommodation operations: Self check-in devices, facial recognition check-in devices, use of smart keys (simplification of room key collection), AI chatbots, cleaning robots  Streamlining in sales and marketing operations: Demand forecasting and room rate configuration utilizing AI (revenue management via AI*9) The use of technology not only has benefits for the hotel, including labour saving and enhanced worker productivity. It also leads to guest satisfaction and enables the hotel to provide a more attentive service. Research*11 has shown that a 1% increase in reputation score leads to a 0.89% rise in ADR and 0.54% rise in occupancy, and consequently a 1.42% increase in RevPAR*10 as well. The quality of personnel is another differentiating factor in a hotel's competitive edge, and is likely to become even more important. Therefore, the use of technology looks poised to spread even further in the coming years, and help to boost hotel earnings.

Deployment of technology

Enhanced worker productivity

Improved guest satisfaction

Enhanced reputation

*9 A technique used in a business such as a hotel, where stock cannot be carried forward. Prices are set at the appropriate level based on a demand forecast, and revenue is maximized by making adjustments to stock (the sale of guest rooms).

Increased occupancy

Increased ADR

Increased RevPAR

*10Revenue Per Available Rooms. Equal to the average daily rate multiplied by the occupancy rate. *11Chris Anderson (2012), “The Impact of Social Media on Lodging Performance”, Center for Cornell Hospitality Report

43


HOTEL

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5.3 Environment Environmental initiatives are a new selection criterion for hotels When choosing a hotel, currently the only way to find out a hotel's environmental initiatives is to research information on the hotel's website and carefully check its reputation. It is not possible to search for a hotel via an OTA*12 based on search criteria such as environmental initiatives. At the same time, there is growing awareness that consideration for the environment is a behavioural criterion in consumer spending. According to a survey by the Consumer Affairs Agency, 59.3% of people aim to "choose environmentally sound products and services" (Figure 5). This not only applies to Japan. In 2015, the United Nations adopted Sustainable Development Goals (SDGs), following which the World Tourism Organization (UNWTO) announced "Tourism and the Sustainable Development Goals". The UN also designated 2017 as the "International Year of Sustainable Tourism for Development", and thus consideration for the environment has entered the global consciousness*13. As accommodation demand increases and the nationalities and values of hotel guests diversify, the way of choosing hotels is also likely to diversify. If hotels are scored on their environmental initiatives, or an international system of environmental accreditation for hotels becomes more widespread and recognised, this should facilitate rankings on OTAs and become a new criterion for hotel selection. For hotels, environmental initiatives also become a differentiating factor, and are likely to impact on their earnings as well.

*12 Online Travel Agent.

Figure 5: Behaviour consumers are aiming for No answer

Trying the least

Depends

Choose environmentally sound products and services

Trying

Source: Consumer Affairs Agency, "Basic Survey on Consumer Intentions", CBRE, July 2019

*13 In some cases, regions with international accreditation for sustainable tourism are being prioritised as cruise ship destinations.

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5.4 Hotel in 2030 A new selection criterion for hotels

Greater scope for enhanced earnings

Environmental awareness is already high, and if reference environmental scores and international environmental accreditations could be listed on OTAs, this would become a new criterion for hotel selection.

Supply is plentiful but not excessive The concentration of the population in Tokyo and ongoing growth in inbound demand are boosting the share of foreign visitors among hotel guests. Existing stock is not sufficient to cope with this demand, either in quantity or quality

The use of technology enables manpower savings and a focus on improving guest satisfaction. As a result, it can be expected to increase the occupancy rate, ADR and RevPAR

ď Ź

Increase in hotels inside large multifunctional developments The concentration of the population in Tokyo has increased real estate demand in Tokyo, and advanced use of land will continue, also from the perspective of economic rationality. As the number of hotels inside large multifunctional developments increases, this will promote the supply of upper class and higher grade hotels, of which there is now a shortage.

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TOKYO

6. D A T A C E N T E R

46


DATA CENTER

TOKYO

6.1 People The growing importance of data centers

Figure 1: Download traffic in Japan via fixed and mobile communications

Sharp increase in data traffic in line with population growth and changing demographics The term “digital native” refers to a person who has been surrounded by digital devices since birth, rather than having been introduced to them as an adult. In Japan, this is the generation born after 1990, when the commercial Internet was introduced. By 2030, this generation will have reached their 40s and will comprise the core of Japanese society. The digital literacy gap between different generations will be smaller, and there will be huge volumes of content and increased use of e-commerce. The population of Japan in 2030 will be 4.9% lower than in 2020, but the population of Tokyo is forecast to increase by 1.1%*1. This means Tokyo in 2030 will see further increase in data traffic. Data traffic has already been growing rapidly, up by 17.5% y-o-y via Broadband as of May 2019, and up by 21.3% y-o-y via mobile communications as of March 2019 (Figure 1). This momentum is likely to continue.

Data centers support huge volume of inter-device communications The use of Artificial Intelligence (AI), Internet of Things (IoT) and big data is forecast to be far greater, leading to an even larger volume of data in circulation. As cloud services become more widespread and communications utilising Virtual Reality (VR) and Augmented Reality (AR) become more diversified, computing resources with high arithmetic processing capability and a high-capacity network environment will be required. Additionally, IoT has started to penetrate fields that are closely connected to everyday life, such as consumer electronics and healthcare, as well as industrial areas including factories and logistics facilities. A vast volume of data communications between devices is developing in various sectors, a trend that looks set to accelerate in the coming years. The data centers supporting these communications will become ever more important, and will become as critical components of infrastructure as power stations, gas supplies, water facilities and public transport. *1 National Institute of Population and Social Security Research, "Population Projection for Japan (2018)".

**1

FTTH, DSL, CATV, FWA

**2

Since May 2011, traffic consisting of mobile communication with mobile phone networks has been partially included in the data.

**3

Cited from "Status of the mobile communications traffic of Japan" (March 2018) published by the Ministry of Internal Affairs and Communications (measured in March, June, September, December)

**4

There is a data discontinuity. As of May 2017, the number of cooperating ISPs increased from five to nine, and the totals and estimates are based on data from these nine companies.

Source: Compiled by CBRE based on “Aggregation and Provisional Calculation of Internet Traffic in Japan" (November 2018 figures) published by the Ministry of Internal Affairs and Communications.

*3 "bps" (bits per second) is a unit of the speed of data transmission via communication lines, etc.

*2 Hourly volume of data transmitted over the network, on the Internet or PC communication lines such as LAN.

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6.2 Technology Evolution of communications technologies and sharp rise in data storage demand The evolution of mobile communications is ushering in the data society

Figure 2: Mobile phone communication speed for each generation

The installation of the fifth generation of cellular network technology services (5G) will get underway in Japan from 2020. Communication speeds of 10Gbps, ultra-low latency and multiple simultaneous connections will be possible, thereby realising a communication environment with a speed and capacity far beyond that of 4G. This will herald the spread of IoT. However, there are already doubts that 5G will be able to keep pace with the expansion in communications traffic in 2030. For this reason, the major Japanese communications carriers, as well as those in Finland, China and Korea, are already starting to develop the communications technologies aimed at the commercialisation of 6G, the successor to 5G. It is said that 6G will be capable of communication speeds at least ten times faster than 5G, with virtually zero latency. In the device and mobile communications fields, a technological revolution occurs around once every ten years. Therefore in 2030, the commercialisation of 6G may be viable (Figure 2). Source: Compiled by CBRE based on a Ministry of Internal Affairs and Communications report on communications policy after telecommunications liberalisation and the future ICT society (2015)

48


DATA CENTER

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Technology Rapid increase in stored data volume will also require new storage vehicles

Figure 3: Forecast of data volume stored in Japanese data centers EB/year*4

Along with the rapid rise in the volume of communications, the data stored in data centers within Japan will also see a sharp increase. According to research by the Ministry of Economy, Trade & Industry, data stored in domestic data centers is expected to increase exponentially in 2030, in line with the increase in created data volumes and data traffic (Figure 3). At data centers, IT equipment such as servers is now being stored more efficiently in high-density racks, in conjunction with downsizing of the equipment and enhanced performance. Data compression technology also continues to improve, making it possible to reduce data transmission volumes and store large volumes of data with smaller storage capacity than before. As a result, the increase in data storage volumes is not necessarily correlated with an increase in data centers. However, it takes around three to five years to develop a data center, including constructing the building frame and facilities, power receiving equipment and connection to the network. Given the possibility of a rapid increase in data storage volumes in the coming years, there could well be a shortage of data centers, despite improvements in performance.

*4 Exabyte (EB): 1 Exabyte = approx. 1018 bytes. Around 1 million terabytes. Source: "FY2017 Survey of Infrastructure Development Status for Data-driven Society" published by the Ministry of Economy, Trade & Industry

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DATA CENTER

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Technology Utilisation of existing assets to accommodate new supply Data centers require ultra-reliable power supply and network, solid foundations and access to roads. However, there are relatively few locations in Japan possessing these attributes. Amid concern about the shortage of data centers, even in advance of 2030, CBRE therefore believes it will probably be necessary to convert and re-use existing property assets. Numerous data centers were built from the late 1990s onward during the IT bubble, and large-scale renewal and rebuilding of obsolete facilities will be required in the coming years. Offices built from reinforced concrete and steel-reinforced concrete have a statutory useful life of 50 years. Depending on a building's state of maintenance, the building frame of a data center can be used for about the same length of time. However, in the case of a data center, servers and other IT equipment installed inside the building are upgraded on a five-year cycle, meaning that the pace of technological reform is much faster than the useful life of the building frame and facilities. For this reason, in the case of large-scale renewal of facilities rather than the small-scale replacement of equipment, or when the structural specifications such as floor load or ceiling height are inadequate, rebuilding might be considered instead. A large number of key data centers were completed in Japan in 2001, almost half of which are located in the Greater Tokyo Area (Figure 4, Figure 5). Key machinery such as electrical and air conditioning equipment are renewed every 15–30 years, meaning that by 2030, almost all of these buildings will be due for renewal. That said, many of them already receive extra-high voltage power*5, network and other infrastructure elements, and in many cases there is a substation nearby. This means that if the decision is taken to rebuild, the development timescale can be significantly reduced compared with the three to five-year period for new developments. In addition, older warehouses or factories/research institutes are also suitable potential sites for data centers. In the case of the former, the specifications required for a data center, such as floor load and floor height, are often already in place. Therefore, if the power supply and network environment can be established, conversion for data center use becomes possible. In the case of the latter, in many cases a large amount of power is used, and if the facilities can be remodelled, it is very likely that the existing power transmission lines can be re-used, although ground pollution can be an issue when rebuilding a factory. *5 One standard for power transmission voltage among the electrical equipment criteria. For example, it is said that at least 15MVA of electric power is needed to develop a medium-sized data center, and to secure this

Figure 4: Establishment of key data centers by data center operators (nationwide) 60 50 40 30 20 10 0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Many older data centers are approaching renewal

Source: Japan Data Center Council, 2016

Figure 5: Locations of main data centers (nationwide)

Others

23%

Tokyo

32%

Osaka

11%

Kinki (excl. Osaka)

Kanto

Chubu (excl. Tokyo)

13%

17%

4%

Source: Japan Data Center Council, 2016

power, "extra-high voltage" exceeding standard voltage of 60,000V is required. Besides data centers, such extra-high voltage is installed in large retail facilities and factories.

50


DATA CENTER

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Technology Improvement in data center specifications promotes the separation of ownership and management Data center development is an area of rising funding demand Data centers are increasingly seeing enhanced specifications, which is raising the cost required for development. At data centers, the latest IT equipment is now being stored more efficiently in high-density racks, and building size is being expanded in order to improve the facility‘s standalone capability. In the past, the guideline specifications for power-receiving equipment at data centers was around 10–20 MW, but in recent years, this has reached 40–50 MW at large data centers, and in some cases, 100 MW. In line with this trend, the development costs for data centers are increasing rapidly. Also, demand for overseas data centers is growing in line with corporates’ global expansion. The development of overseas data centers by domestic operators and M&A jointly with overseas data center operators has also increased. In response to the soaring cost of data center development and rising development demand, both in Japan and overseas, recent years have seen a steady increase in co-investment in data centers (Figure 6). In many cases, the data center is owned by the operator company. This is mainly because once a data center opens for business, it needs to continue operating its customers' systems without downtime, meaning that it is not easy to relocate or close a data center. In addition, flexible handling is required for operation. A data center's facilities also become a differentiating factor, and this constitutes highly confidential information for the operator, who would want to avoid it being disclosed externally. However, as data centers become larger and their storage facilities denser, balance sheets can become bloated if the operator shoulders not only the cost of installing facilities such as electrical equipment, but also the cost of constructing the building itself. This leads to deterioration in management indicators such as ROA and inevitably impacts on the procurement of funds. This is why there can be benefits to the data center operator of development through co-investment with a partner, use of investment funds, or selling the data center and switching from ownership to lease (i.e. sale and leaseback) so that operation is continuous. 51


DATA CENTER

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Technology As in the case of logistics facilities and hotels, data center management and operations require special expertise, and such expertise ties in directly to a facility's competitive edge. For a data center operator, the use of external funds or taking the data center off balance sheet arguably brings benefits such as allocating more capital to those areas directly correlated with the core business and enhancing competitive strength, including securing human resources and bolstering the operating structure.

Figure 6ďźšRecent key investments in data centers Operator

Details

Announcement Date

Area Invested In

Operation Scale

NTT Group

Establishment of investment subsidiary "NTT Global Data Centers" through joint investment by NTT Group

2018/11/1

US, Europe, APAC incl. Japan

JPY 1.25 billion (capital)

Signed Memorandum of Understanding for establishment of investment fund

2019/1/1

China

JPY 300 billion (initially 100–150 billion)

Establishment of investment fund

2019/6/1

APAC incl. Japan

US$ 1.0 billion (initially US$ 5 million)

Equinix and GIC set up a JV company in Q3 2019

2019/7/1

Europe

US$ 1.0 billion upward

Itochu Corporation, CITIC Group Corporation

Lendlease

Equinix, GIC

Source: Compiled by CBRE from company press releases, October 2019

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DATA CENTER

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6.3 Environment Data center operators actively engaged in environmental initiatives Environmental measures are essential for data centers Data centers consume vast amounts of energy. When comparing data centers with other types of building in terms of the energy consumed, data centers use far more energy on a standalone basis (Figure 7). Following its ratification of the Paris Agreement, Japan is targeting a 26% reduction in CO2 by 2030 compared with 2013. The government’s Basic Energy Plan also calls for an increase in the share of renewable energy in future, such as solar, wind and geothermal power. With the use of information and communications technology (ICT) now a prerequisite for corporate business activity, data centers perform a crucial role as storage infrastructure for critical systems and data. In the development and operation of future data centers, environmental measures will be essential, especially those related to saving energy and the use of renewable energy.

Figure 7:Energy consumption rate by building use (weighted average rate (MJ/m2/year))*6

Source: Compiled by CBRE from research report on energy consumption in buildings by the Building-Energy Manager's Association of Japan (2019) *6 The sum of primary energy consumption volume (electric power, gas, oil converted to thermal units) divided by the total floor area [MJ/m2/year]; this value is used for a comparative evaluation. 1MJ = 0.2778kw

53


DATA CENTER

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Environment Data center operators actively engaged in environmental initiatives Management becoming more mindful of sustainability Some data center operators are now using renewable energy not only for the facility itself, but also for all power used in operations. The number of companies affiliated with the RE100, an alliance of companies committed to 100% renewable electricity, is increasing. Compared with a few dozen member companies in 2014 when the RE100 first launched, as of 2019 there are 203 companies. The number of Japanese member companies has also increased from six in 2018 to 24 in the space of just one year (Figure 8). The RE100 also includes data center operators from different countries, including cloud services*7. Google has already achieved a 100% commitment, with the volume of renewable energy they purchased in 2017 exceeding the total energy used. As of 2018, Equinix had also increased its renewable energy coverage ratio to 92% worldwide*8. These initiatives are promoting the development of renewable energy generation facilities, and operators are also increasingly developing such facilities, which is helping to lower the development costs.

Figure 8: Growth in RE100 affiliation Overseas

Japan

250

200

150

100

50

0 2015.3

2016.3

2017.3

2018.3

2019.9

Source: Compiled by CBRE based on RE100 website data (http://there100.org/re100) , October 2019

*7 Main data center and cloud operators affiliated with the RE100: Apple, BT Group, Equinix, Facebook, Fujitsu, Google, Hewlett-Packard Enterprise, Infosys, Iron Mountain, Microsoft, Rackspace, Salesforce, Sap, Schneider Electric, VMware, etc. , October 2019

*8 According to Equinix website (https://www.equinix.co.jp/) , October 2019

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DATA CENTER

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Environment Sustainable development and operation becoming the mainstream for data centers Green data centers using renewable energy Around 70% of data centers in Japan are located in urban centres including Tokyo and Osaka. However, development in the colder northern areas of the country will also be an option in future. This is because airconditioning systems that use natural energies such as outside air and snow/ice – a form of renewable energy – can save significant amounts of power. IT equipment such as servers and racks use the most power, accounting for around 50–60% of total power consumption, followed by air conditioning, at around 20–30%. The use of outside air or snow/ice makes it possible to eliminate most of the power used for air conditioning. In recent years, a number of data centers have been developed that use natural energy, and these data centers have an extremely good power usage effectiveness (PUE) ratio*9 (Figure 9). As well as environmental benefits, the use of natural energy also helps to enhance data center earnings through lower electricity costs. Companies are continuing to shift their IT systems from in-house operation to data centers, including use of the cloud. If this consolidation of IT systems in energy-efficient data centers continues, overall energy efficiency will increase, meaning that it is an effective way to reduce CO2 emissions. In this way, the development of green data centers with high energy efficiency using renewable energy looks set to continue in the coming years.

*9

PUE is an indicator of energy efficiency (the closer it is to 1.0, the more energy efficient); PUE = [power consumption volume for entire facility] ÷ [PC power consumption volume]. The value for a typical data center averages 1.5–2.0.

55


DATA CENTER

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Environment Figure 9: Main green data centers in Japan Operator

data center location

Established

PUE

Sakura Internet

Ishikari City, Hokkaido

2011

1.0X

Aoimori Cloud Base

Rokkasho Village, Aomori Prefecture

2015

Under 1.2

data dock

Nagaoka City, Niigata Prefecture

2017

1.19

Kyocera Communication Systems*10

Ishikari City, Hokkaido

Scheduled 2021

–

Source: Compiled by CBRE from company press releases, October 2019

*10 Kyocera Communication Systems is working to achieve a zero-emissions data center using 100% renewable energy, including natural energy.

56


DATA CENTER

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Environment Data centers to focus on sustainable development and management Increasing focus on ESG investment set to promote sustainability Changes in the environment surrounding renewable energy are also starting to emerge in the investment market. One of these changes is increasing moves toward divestment*11, whereby investors focused on ESG (Environment, Social and Governance factors) are withdrawing from investment in the coal industry. There has been an increase in institutional investors committed to divestment, with assets now approaching US$10 trillion (Figure 10). This means that companies or real estate entities that conduct management and procurement with a focus on sustainability, including commitment to the SDGs and RE100 membership, will tend to be favoured by investors. Arguably, such ESG-focused investment funds for developing and operating data centers will also be more readily available due to the active promotion of sustainable development, including the use of renewable energy.

Figure 10:Institutional investors committed to DivestInvest and total assets Total assets (left axis)

billion US$

No. of committed institutions (right axis)

12,000

1,200

10,000

1,000

8,000

800

6,000

600

4,000

400

2,000

200

0

2013

2014

2015

2016

2017

2018

2019

0

Source: Compiled by CBRE based on DivestInvest website data (https://www.divestinvest.org) , October 2019 *11 Divestment is the opposite of investment. Investors are already withdrawing financial assets by selling off shareholdings and bond holdings in fossil fuels or the associated industry, based on ESG criteria.

57


DATA CENTER

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Environment Green data centers suited to ESG investment The ESG investment market focuses on non-financial data and seeks stable, long-term returns The ESG investment market is growing. Global ESG investment currently totals around US$ 31 trillion, up 34% in the two-year period from 2016 to 2018, registering strong growth in all regions (Figure 11). The share of ESG investment is also rising in all countries, except in Europe. The share of ESG investment in Japan has jumped from 3.4% in 2016 to 18.3%, and its presence is increasingly visible (Figure 12). The commencement of ESG investment by the Government Pension Investment Fund (GPIF) in 2017 has had a significant effect. ESG investing is guided by non-financial data related to environment, social and governance performance, and ESG investors seek long-term, stable returns. Green data centers could therefore be well suited to ESG investment relative to other asset classes, due to their sustainable development and operation. The effect of energy conservation at data centers is substantial, meaning that they make a significant contribution to measures to tackle climate change. Additionally, data centers seldom ever close temporarily or relocate, therefore providing investors with income through stable operation over the longer term. Moreover, they are expected to have increasing importance as a form of social infrastructure in conjunction with the arrival of the data society. Data centers will continue to expand in both scale and storage density, and development costs are rising. For data center operators, the ESG investment market could become a potent source of funds. For this reason, the disclosure of data centers' track record, including income/expenditure and transactions, will become an issue. In the US REIT market, data centers are already established as a sector. In Japan too, it is expected that data centers will be increasingly incorporated in listed investment portfolios, including REITs.

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DATA CENTER

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Environment Figure 11:ESG investment by region (Unit: billion US dollars)

Figure 12:Share of ESG investment by region

2016

Europe

Europe 2018

United States

Canada

Australia/New zealand

Japan

70%

United States 50% Canada 30% Australia New zealand 10% Japan

0

4,000

8,000

12,000

Source: GSIA “Global Sustainable Investment Review 2018”, CBRE, October 2019

16,000

-10%

2014

2016

2018

Source: GSIA “Global Sustainable Investment Review 2018”, CBRE, October 2019

59


TOKYO

7. I N V E S T M E N T

60


INVESTMENT

TOKYO

7.1 People Institutional investors boost investment in real estate Real estate investment by institutional investors is rising worldwide. A 2019 survey by the Association for Real Estate Securitisation (ARES) in 2019 found that the proportion of pension funds*1 invested in physical real estate or securitised real estate products stood at 59%. This figure rose to 91% for "general institutional investors" including life insurers. In Japan, J-REITs and private REITs account for a significant share of investment. Research by CBRE has found that their top reasons for investing are "to enhance stability of income stream" and "to secure stable cash flow". Despite the recent upturn in real estate investment, the sector still only accounts for a small share of overall investment assets in Japan. The same survey by ARES found that the share of real estate in institutional investors' managed assets (simple average) in Japan was 2.9% for pension funds and 2.1% for general institutional investors. In contrast, real estate's share of overseas institutional investors' portfolios (pension funds, sovereign funds, etc.) in major markets stood at between 4% and 15% (Figure 1). CBRE believes demand for real estate investment in Japan, which offers the prospect of relatively higher yields and stable income compared with other financial products, is likely to grow further in the coming years, particularly as a destination for long-term funds, including pensions.

Figure 1: Investment in Real Estate as a Proportion of Institutional Investors’ Portfolios 16% 12% 8% 4% 0%

2.9% Canada

U.S. Americas

U.S.

UAE

Norges EMEA

Singapore

Korea

Japan

AsiaPacific

Source: The Association for Real Estate Securitisation, 16th “Questionnaire Survey on Real Estate Investment by Institutional Investors” and information disclosed by investors, CBRE, November 2019. *1 Pension funds include employees’ pension fund, defined-benefit pension plan, mutual aid associations and public pension

61


INVESTMENT

TOKYO

7.2 Environment Institutional investors adopt ESG criteria

Figure 3:Green Bonds issued by J-REITs #

Total amount issued (JPY, billion)

Invesco Office

1

5.5

2014% (Figure 2). According to statistics published in 2018 by the Global Sustainable Investment Alliance (GSIR),

Kenedix Office

1

2

global ESG investing totalled around US$30 trillion in 2018, up 34% in just two years. Although the figure for

Japan Excellent

1

4

Japan Real Estate

1

10

Japan Hotel

1

2

AdvanceResidence

2

8

AEON REIT

1

12

Japan Retail

2

15

Activia Properties

2

9

have obtained LEED or other forms of environmental certification are likely to be more positively viewed by

ORIX JREIT

1

7

investors compared with buildings that do not have such ratings.

United Urban

1

10

Figure 2: Stewardship Code – Number of Signatory Institutions

Sekisui House Reit

3

11.5

Daiwa Office

1

6

Japan Prime Realty

1

5

Nomura Master

1

3

GLP J-REIT

3

18.1

ITOCHU Advance Logistics

1

1.5

Nippon Prologis

1

6

Interest is growing for Environmental, Social and Governance (ESG) criteria when considering potential investments.

Sector

J-REIT

With regard to equity investments, 269 institutional investors had signed up to the Principles for Responsible Institutional Investors – Japan's Stewardship Code"- as of September 30, 2019, more than twice the number in

Office

Japan is relatively low at around US$2 trillion, ESG investing increased 4.5-fold over the same period, well above the 38% increase in the U.S. to US$12 trillion, and the 17% increase in Europe to US$14 trillion.

Hotel

Financing through green bonds and green loans has also grown in recent years. According to the Climate Bonds Initiative, US$4.1 billion worth of green bonds were issued in Japan in 2018, up 22% y-o-y. Total

Residential Retail

issuance since 2014 has reached US$9.7 billion, 35% of which was used for investment in architectural structures including buildings. Green bond issuance by J-REITs has so far totaled JPY 135.6 billion issued by 18 REITs (as of end-2019) since the first issuance in May 2018 (Figure 3). In the coming years, green buildings that

Trust banks

300

Investment managers

Insurance companies

Pension funds

Diversified

Others *2

250 200 150

Logistics

100 50 0 2014

2015

Source: Financial Services Agency, CBRE, November 2019.

2016

2017

2018

2019 Source: Public information, CBRE, December 2019.

*2 service providers, etc.

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INVESTMENT

TOKYO

7.3 Investment in 2030 Occupier focus shifts from "space" to "service" Diversifying workforce and workstyles transforming CRE strategy

Office → Coworking+Service

Restaurant

Bar Coworking

For companies to secure and retain the necessary personnel in the coming years, it will be crucial to accept a greater diversity of human resources. They will need to provide environments that enable varied work styles for their employees and which allow them to work efficiently and comfortably. This trend is also likely to result in the greater geographic dispersion of offices, such as main offices being located at sites with high operating efficiency and satellite offices being established close to residential areas. For this reason, there may be more instances of companies selling city-centre offices that they had previously owned, or of sale and (partial) leaseback.

Fitness club

Cafe

Meeting room

Hall

Logistics → Shared Logistics

Investing in real estate as an operational asset At the same time, the coming years are likely to bring greater variability in cash flow, even for core assets. This is due to a growing need to be flexible when accommodating tenant requirements, many of which will be facilitated by evolving technology. As well as conventional office space provided at fixed rents, coworking offices on a pay-per-month basis and enhanced amenities for tenants, such as gyms and cafes, are likely to be essential elements in maintaining and enhancing the competitiveness of prime office buildings. For logistics facilities, logistics sharing utilising automation technology is likely to become more widespread. In the retail sector, enhancing the customer experience will become more important than physical product sales.

Retail → Pop-up, Co-Retailing

As these changes are demanded of commercial real estate, there will be a growing need for a style of asset management that understands and can respond to the tenant's requirements, even for core assets. In effect, almost all asset types will become operational assets. Brand A

Brand B

Brand C

63


INVESTMENT

TOKYO

Investment in 2030 Real estate as an operational asset Growing importance of asset management

Capital Flow Funds flowing into real estate, where yields are higher and cash flow is relatively stable  Further expansion of investment by institutional investors  Institutional investors incorporating ESG factors into investments

Real Estate Investment Real estate as an operational asset Growing importance of asset management

 Greater geographic dispersion of the workplace, with offices being located at sites with high operating efficiency and satellite offices established close to residential areas  More companies may sell city-centre offices or offer sale and (partial) leaseback

Occupiers Occupiers' needs shifting from "space" to “service"  Diversifying human resources and work styles in the workplace  Greater geographic dispersion of the workplace, including satellite offices close to residential areas

 More variability in core asset cash flow, increased importance of asset management Prime offices: Enhanced amenities essential for maintaining and enhancing competitiveness Logistics facilities: Logistics sharing utilising automation technology Stores: Initiatives to enhance the customer experience


For more information about this regional major report, please contact: JAPAN RESEARCH Hiroshi Okubo Head of Research hiroshi.okubo@cbre.co.jp

Koichi Suzuki Office Specialist, Senior Director koichi.suzuki@cbre.co.jp

Hisari Asai Office Specialist, Analyst hisari.asai@cbre.co.jp

Kaoru Kurisu Retail Specialist, Director kaoru.kurisu@cbre.co.jp

Kazuko Takahashi Industrial Specialist, Senior Director kazuko.takahashi@cbre.co.jp

Yoshitaka Igarashi Hotet Specialist, Associate Director yoshitaka.igarashi@cbre.co.jp

Yuji Iwama Data Center Specialist, Associate Director yuji.iwama@cbre.co.jp

Asuka Honda Investment Specialist, Director asuka.honda@cbre.co.jp

Sayuri Kaneko Office Specialist, Analyst sayuri.kaneko@cbre.co.jp

For more information regarding global research, please contact: Richard Barkham, Ph.D., MRICS Global Head of Research| Global Chief Economist richard.barkham@cbre.com

Neil Blake, Ph.D. Global Head of Forecasting neil.blake@cbre.com

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

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CBRE RESEARCH This report was prepared by the CBRE Japan Research Team, which forms part of CBRE Research – a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe. All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/research-and-reports Š 2020 CBRE, Inc.

Profile for CBRE Japan

TOKYO 2030 - The Future of Real Estate: Shaped by People, Technology, and the Environment  

TOKYO 2030 - The Future of Real Estate: Shaped by People, Technology, and the Environment  

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