(To read more on the industrial market, click here.)

TOKYO-If any place could use more storage space, it would be this archipelago, and not just by being the most land constrained and densely populated country of the industrialized world. According to a new report from ProLogis, numerous other factors have created Japan’s vastly undersupplied warehouse/distribution network, one struggling to keep up with the resurgent economy but a sector ripe with opportunities for third-party developers to address the crisis.

“Looking ahead, Japan’s logistics property network would appear to have substantial room for growth,” according to the 20-page review, which was authored by Leonard Sahling of ProLogis and John Tofflemire, president of Sapient Real Estate Consulting in Tokyo. ProLogis is among a handful of firms that has built for-lease space in Japan, having completed 19 properties encompassing 10.5 million sf with another 5.7 million sf under way, all since its initial foray in 2002. The space is 100% leased, ProLogis says.

In the report, Sahling describes his firm beginning to research the Japanese for-lease market in 1999 only to find it was virtually non-existent. Due to arcane lease laws and the high value of real estate, most companies owned their distribution and warehouse facilities, researchers found. ProLogis could identify just one other private developer who had built distribution space to market for-lease prior to 2002, Sahling says, and the entity had only constructed two such projects, one in 1990.

“The vast majority of Japanese warehouses are cramped, tired spaces designed for storage and ill-suited for use as fast-turnaround distribution facilities,” according to the study. Many firms did not modernize their properties, making them unattractive to both developers an investors, and so little new space was constructed in the 1990s and start of this decade that “they failed even to replace the 2% to 3% of the inventory in place that outlives its useful life every year,” the report adds.

Estimated at about 30 million sf since 2002, newly built leased space “represents a tiny sliver of the overall market for warehouse/distribution space” of approximately five billion sf, according to ProLogis.

Efforts are under way to address the situation, however, with the research finding that dozens of Japanese companies have begun to experiment leasing excess space, most recently Nippon Express. A steep plunge in commercial property prices is one reason, says the ProLogis report, explaining that many Japanese no longer believe “the myth” that values would continue to rise. Also, new commercial lease laws are said to provide a more tolerant treatment of landlords versus tenants, partly an outgrowth of Japan’s genuine desire to improve the efficiency and flexibility of their distribution network, says the report, and a change that seemingly comes none too soon.

“The recent blossoming of Japan’s markets for leased logistics space has occurred while Japan’s economy continued to languish,” notes the report. “With the economy now recovering from its 14-year malaise, those property markets should continue to strengthen and grow at an even faster pace.”

Given the lack of land, creating the necessary distribution supply will not be easy, as evidenced by the multi-story warehouses prevalent in such cities as Osaka and Tokyo. Albeit much cheaper than it was before Japan’s economy cratered in the early 1990s, the report estimates that industrially zoned land can still sell for five to eight times the premium prices for similarly zoned terra firma in US industrial markets. About the size of California, Japan’s population of 125 million people is concentrated in the coastal plains, which are about 30% of the land mass.

For all the obstacles, the ProLogis report suggests more developers will consider building for-lease space in the coming years, largely because the need is too great. “Japanese companies all realize they must have state-of-the-art distribution networks in order to compete in the global marketplaces,” says the report.

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