Economy: Ukraine Crisis and Rising Commodity Prices Dampen Tenants’ Capacity to Pay Rent
February’s unemployment rate was 2.7% with little change in the outlook. However, Japan’s economic pulse remains weak, with the Russia-Ukraine conflict, along with import prices hitting a forty-year high, raising the risk of stagflation ahead. Real GDP growth is revised down to +3.7% in FY2022 and +1.2% in FY2023. Through rising food and commodity prices, February’s Corporate Goods Price Index rose 9.3% y-o-y for a twelfth consecutive monthly rise. However, February’s CPI rise of 0.9% is unlikely to breach the 2% target. A growing gap between wholesale and consumer inflation trends, unique to Japan, means that the FY2022 annual ordinary profit is expected to fall by 32%¹, as most corporations are unwilling to pass on input price increases to consumers. Consumer sentiment remains weak relative to retail traffic recovering closer to the pre-COVID level. A weak currency outlook is also expected to dampen household spending, limiting future capacity to pay rent particularly for mass-market retailers.
Supply and Demand: Retail Leasing Demand Sustained in Upscale Locations and Urban Redevelopment
Excluding luxury brands, the pandemic has disrupted most planned relocations in high street retail. In response to falling retail rents, some demand has emerged as more tenants seek superior locations at lower rents, and more developers are renovating current facilities. While we expect total retail footage to fall in less competitive areas, rents in top locations are unlikely to be affected. Vacancy remains high in the Central 3 Wards, but is low in suburban shopping centers, underpinning stable demand from core investors. Urban redevelopments continue mostly with older mid-sized facilities in regional cities and repurposing underutilized rail facilities in major stations.
Rent: Limited Upside Until Recovery of Overall Consumer Sentiment and Inbound Tourism From 2024
Retail leasing demand remains mixed, given rising location premiums within submarkets. We are also cautious on the expanding supply pipeline in key submarkets such as Ginza. By district, the pandemic disruption is most evident in Shinsaibashi, where the bottom rent fell 20.0% y-o-y, the lowest level since Q4 2012. Development in Umeda also impacted Shinsaibashi’s top rent, recording the lowest level since Q3 2016. With inbound tourist arrivals tracking 0.6% of the 2019 level, we expect tourist demand recovery no earlier than 2024². Expect an extended period of financial stress among tenants targeting inbound tourist spending in less competitive retail locations.