The glass was undoubtedly half-full for speakers and delegates at the ULI Japan Fall Conference, held in Tokyo in November, but the rising cost of construction and debt is a concern.

Closing keynote speaker Jon Tanaka, Head of Asia Pacific and Co-Head of Japan at Hines (pictured above), noted that Japan was the most liquid real estate market in the region and the most popular with foreign capital, attracted by that liquidity and a strong economy.

Speakers were broadly in agreement that Japanese real estate has strong prospects across multiple sectors, despite a variety of challenges. For example, the problem of high and rising construction costs was cited as a challenge by numerous speakers, one noting that construction costs for logistics properties have risen by 50 percent in the past two years. These comments are supported by the findings of the ULI/PwC Emerging Trends In Real Estate® Asia Pacific 2026 report, where survey respondents cited construction costs as the most significant problem for real estate in the region. However, Japan logistics experts also believe that rising rents mean new development remains viable. Rental growth is expected to be more significant than cap rate compression across sectors, as debt costs have risen in the past year and cap rates remain comparatively low. Nonetheless, a positive spread between the cost of debt and cap rates remains in place. 

Demand for data centres is strong, but not the grid
The frailty of the Japanese power grid is holding back data centre development, despite strong demand, said sector experts from Softbank and NextDC. Developers are trying to get round this, for example Softbank is building an AI training data centre in Hokkaido, but most demand is for centre near cities. The relaunching of Japan’s nuclear power sector will help in the longer run, but power constraints remain the major bugbear in the short term. 

Residential investors focused on income growth
Wage inflation of around 3 percent supports continued rental growth in the multifamily residential sector, as does increasing immigration. Larger cities such as Tokyo and Osaka continue to grow as people move from provincial Japan. However, speakers noted that rental growth has outpaced wage growth in the past year, which suggests limits on future growth. 

Logistics battles the “2024 problem”
In 2024, legislation was introduced to regulate the hours worked by delivery drivers, which has exacerbated labour shortages and affected the logistics real estate market. Larger, better located facilities are expected to outperform as a result. While rental growth supports new development, despite rising construction costs, more refurbishment of older facilities is expected.  

Hospitality looks strong despite drop in Chinese visitors
The Japanese hotels market has seen “exceptional growth and momentum” since the end of the pandemic, said Abhijay Sandilya, Managing Director – Japan & Micronesia at IHG® Hotels & Resorts and CEO, IHG ANA Hotels Group. Despite a recent fall off in Chinese visitors due to a political spat, some observers are predicting Japan will exceed 70 million annual visitors by 2030, ahead of the government’s targeted 60 million. 

Tokyo office and Ginza retail remain strong
Tokyo is unusual amongst global cities in having a thriving office market and a strong retail market. Office vacancy is below 2 percent and more than half Tokyo’s office occupiers are looking to expand. Meanwhile tourism growth and new launches from retail brands continue to support the Ginza retail market.