UL: Please tell us more about your company and your relation to the self-storage industry.
Cushman Wakefield is a global real estate service provider. We offer services ranging from valuation, leasing, sales, asset management, property management, and project and development management. We also support investors in purchasing self-storage assets in Japan and globally. Over 50,000 people operate in over 60 countries at our company.
UL: What do you see as the drivers behind self-storage demand in Japan, and how is it different from other markets?
In general and similarly to other countries, demand for self-storage comes from four types of life events: death, divorce, density, and dislocation, or 4Ds. One of them is death. The passing of a family member creates a temporary need for self-storage for those who inherit, especially if they plan to sell the property – moving things to vacate premises. The second life event is divorce. When a couple splits up, they move into a new, often smaller places. They need a space to store items until it is decided how to split everything up or simply need extra space to keep their bulky goods.
Density is a more pronounced driver of demand in the Japanese market. While not as bad as in Hong Kong, apartments in Japan’s metropoles are much smaller compared to western cities. When you reach the storage capacity of your apartment or house, self–storage can help bridge the gap. The last life event is dislocation. We saw this, especially during the COVID pandemic when demand for self-storage grew. Before, it was common to commute to the office every day, and in fact, less than 10% of companies in the Greater Tokyo area even offered Work-From-Home flexibility to employees. Now several companies have moved to hybrid working, and employees need to create space at home to work: A desk, a computer, maybe even a second screen, and if there are two or more working in the same household, then it’s double that. It seems that people now keep more food at home, creating extra demand for space. People with full remote work options tend to move to suburbs for greener and larger spaces, but those who still have to commute to the office a few days a week show an inverted trend, moving into the city as they find living in the city offers more efficiency with less commuting. As housing prices in Tokyo are at a record high, some of them have to settle for a smaller size and extra storage space outside their home.
UL: Do you see potential for B2B usage of self-storage in Japan?
Absolutely. Originally self-storage was a B2C business model, but as you are aware from news headlines, many companies are considering downsizing their office. Fujitsu, for example, announced during the pandemic that they plan to reduce their office footprint by 50%. They let their staff work from home and use satellite spaces, which will help attract talent and increase retention of existing staff. Needless to say, this generates additional demand for self-storage.
UL: Is self-storage an attractive capital market investment in Japan?
Institutional investors – real estate funds, pension funds, insurance, and other large-scale investors typically invest in one of four sectors: office, retail, logistics, and multifamily (residential). Self-storage is considered as one of several niche sectors that we group under ‘alternative’. This includes life science facilities, medical centers, data centers, and others. Self-storage has growth potential and has been on the radar of those investors for a long time, for at least ten years. The asset class is known to offer higher yields: some with over 100 basis points over offices or other traditional sectors. Generally, the adoption rate for self-storage is still less than 1%, meaning the market is still in its infancy in Japan, albeit with great growth potential.
We don’t yet see large-scale investments in the Japanese self-storage market because of the size of the capital requirement. Institutional investors prefer to make substantial investments – over 30, 50, 100 million USD, for example. However, for self-storage, we are looking at sums in the area of 5 to 10 million. This does not result in sufficient diversification effects for the investor. It’s not yet as scalable as they hope to commit.
The second reason is the access to operators. Self-storage is still a newer asset class for the investors and requires active management, and in such cases, they prefer to work with operators. There is also a timing mismatch: once the occupancy reaches 85-90 % level, it gives a preferable stable income flow that those investors prefer to have in their portfolios; however, because self-storage is still mainly B2C, it can take up to a year or over to fill the space.
When we look to more mature markets, like the US or UK, we see that self-storage targets capital investment, especially when investors partner up with larger operators. I think the key is for operators and investors to foster good relations and partnerships so then both can benefit from a win-win situation.
UL: Do you foresee any changes in light of the current economic and geopolitical situation?
The capital market (or investment market) performed exceptionally well over the last years, even during the pandemic. With the exception of the retail and hotel industries, we saw capital growth across all sectors. In fact, investors have plenty of drypowder, and there has been a lot of focus and investment in logistics and multifamily properties. Despite the macroeconomic situation weakening and rents going down, the weight of capital is still so abundant that it has pushed up market pricing.
Inflation caused supply chain disruption, also accelerated by the Russia-Ukraine war, is affecting two determining factors of the real-estate market: construction cost and the cost of debt dictated by the monetary policy of the BOJ. For now, the BOJ has not announced changes to its monetary policy, but if they do increase interest rates, that will affect the cost of lending and the yields that investors expect.
Looking at the corporate price index, we see substantial increases in cost: logistics, raw materials, and construction materials – steel and oil in particular – are increasing. This is already affecting the returns of development projects, which of course, includes self-storage.
UL: What are the next steps by investors in the self-storage market?
A few investors have already announced their plans to launch a real estate fund based on self-storage. When looking at markets like the US, self-storage is an established investment opportunity. As mentioned, we have not seen this in Japan because of the size. You first need to build a portfolio of 10 to 20, and there are players currently working on this.
For example, Arealink, a large operator with its own self-storage facilities, has announced its ambition to launch a private real estate fund. Reportedly they plan to transfer their assets into a real estate vehicle for investors. This is encouraging news as this kind of securitization of self-storage has not happened much in Japan. Once those players launch their funds, the self-storage market will be more appealing to large–scale institutional investors and stimulate an investor-operator-customer ecosystem for its next stage.