In the early 2020s, the investment real estate market regained activity as the economy recovered from the new Corona disaster. In particular, Japanese real estate investment reached a higher level in 2024 than in the previous year, with domestic investors leading the market. On the other hand, there are many uncertainties surrounding the real estate market, such as global inflation trends, geopolitical risks, and Japan's declining population. This article analyzes the current state of the investment real estate market as of 2025 and discusses future projections for the next 5 to 10 years from the perspectives of urban and rural areas, and commercial and residential properties. It also touches on the impact of external factors such as interest rates, inflation, technology (real estate tech), and ESG factors, and suggests strategic actions that property owners should take. We will explain the technical content as clearly as possible, so please refer to it as a reference for future asset management.
Supply-Demand Balance and Price Trends: In 2025, the Japanese investment real estate market is generally firm. Looking at the most recent land price trends, land prices rose for the third consecutive year in all categories, including commercial and residential land. On the demand side, domestic and foreign investment money that had been stagnant since the Corona disaster has been flowing into the real estate market, and the amount of investment in 2024 (first three quarters) has already reached a higher level than the full year of 2023. Foreign investment was also temporarily active due to the depreciation of the yen, but recently investment has been increasing mainly by domestic investors. Supported by strong investment demand, real estate prices are at record high levels, with commercial real estate prices up approximately 20% from pre-Corona levels. On the supply side, new large projects continue to be supplied mainly in urban areas. In central Tokyo, the supply-demand balance is favorable, as vacancy rates are improving and rents are rising, while new supply of office buildings will be active by 2024. In the residential sector, the supply of new condominiums (due to high construction costs and labor shortages) has led to a shift in demand to existing properties, but supply is expected to recover in some areas in 2025. While prices continue to rise in major cities such as the Tokyo metropolitan area, there are some cases of weakness in regional areas due to declining demand.
Yield (cap rate) trends: With recent price hikes, real estate investment yields (cap rates) have been on a long-term downtrend and are now at historically low levels. In the Japanese real estate market, which has been supported by a policy of ultra-low interest rates, many properties are located in high-priced areas, and as a result of the decline in expected yields, J-REITs and other indices have been underperforming equity indices due to a sense of overvaluation. However, long-term interest rates have been on the rise since 2023 as the Bank of Japan has begun to modify its monetary easing policy (the 10-year JGB rate temporarily exceeded 1.2%). In general, rising interest rates can push up real estate investment yields and cause prices to fall. However, there are currently no major changes in the real estate market. According to a survey by the Japan Real Estate Institute, more than 70% of investors said that a slight rise in interest rates would not change their investment stance, and as long as long-term interest rates remain below 2%, the prevailing view is that there will be no impact on the market. In fact, the real estate investment market in 2024 was booming even as interest rates rose, and the trend of declining yields (and rising prices) was maintained. This is due in part to the increase in rental income resulting from higher inflation and the increased financial soundness of real estate companies, which has increased their resistance to interest rate hikes. In general, the current yield level is stable at a low level, and a full-fledged rise in yields (price adjustment) will depend on future interest rate trends.
External Factors and Market Sentiment: Looking at the world, geopolitical risks such as the situation in Ukraine and the debt problems of the Chinese real estate industry represented by China's Hengda Group are still smoldering and may affect investment sentiment. However, the relative safety and stability of the Japanese real estate market has earned it a reputation as a "contingency shelter," and there are currently limited signs that overseas uncertainties will directly cause a major downturn in the domestic market. Rather, the pace of global interest rate hikes is slowing in 2024, raising expectations of a global market recovery. The Japanese economy as a whole is beginning to show signs of brightness, with the Nikkei Stock Average hitting a bubble-era high, and the number of tourists visiting Japan is expected to exceed the pre-Corona level, providing a tailwind for both domestic and foreign demand. Overall, the investment real estate market in 2025 is maintaining a firm tone, and while there are basic market trends for real estate owners to follow, there is also a need for careful discernment in preparation for the future.
The following is a summary of the outlook for the investment real estate market over the next five to ten years, in terms of urban and rural areas, and commercial and residential properties. While the Japanese economy is expected to grow moderately and inflation is expected to remain high, medium- and long-term issues such as a declining population and rising interest rates will also arise. Let's look at future trends based on the impact of these compounding factors on the real estate sector.
Strengths of Major Metropolitan Areas: The three major metropolitan areas, including Tokyo, Osaka, and Nagoya, are expected to continue to enjoy relatively strong markets. Despite the declining population of Japan, the trend of population and business concentration in major cities continues, and real estate demand in urban areas is expected to remain firm. In fact, it is generally predicted that real estate prices will remain flat to rise moderately in the three major metropolitan areas in 2025. New condominium prices in central Tokyo remain at high levels, and the distribution of existing condominiums is also becoming more active. In the office building market as well, vacancy rates have remained low, particularly for Tokyo A-grade buildings, and rents have experienced a sharp post-Corona recovery. A series of redevelopment projects are planned in central Tokyo over the next few years, but tenant demand is strong, partly due to the rise of DX-related companies and start-ups, and is expected to absorb the new supply. In terms of commercial facilities, the trend of "returning to the heart of the city" will continue, and properties in prime locations in the city center will continue to offer investment opportunities. In the hotel market, the increase in the number of inbound visitors to Japan is driving the opening of luxury hotels by foreign capital. Although it depends on the global economy, there is a high possibility that income-producing real estate in metropolitan areas will maintain a certain level of stability and growth.
Challenges in regional areas: In contrast, the risk of declining demand and increasing vacancies is likely to increase in regional cities and depopulated areas. In areas with declining and aging populations, housing demand will inevitably taper off, and rental housing may face rising vacancy rates and falling prices. Office and commercial facilities may also struggle to attract tenants in an increasing number of areas. However, even in rural areas, there are still areas with potential, such as prefectural capitals, core cities, and tourist destinations. In areas where tourism demand can be expected, investment in hotels and inns is strong, and new housing needs may arise in areas where the number of people moving to rural areas has increased due to the spread of remote work. In general, the future will see a polarization in regional areas. Real estate owners need to place more emphasis on the location of their properties in order to identify areas with growth potential and areas where decline is inevitable.
Outlook for Residential Real Estate: In the residential market, the themes for the foreseeable future will be high prices and supply/demand adjustments. The existing home market will continue to expand in reaction to the recent jump in new home sales prices on the back of rising construction costs. Over the next five years or so, condominium supply is expected to gradually increase in the Tokyo metropolitan area, and new construction prices may also remain sluggish. However, it is generally expected that housing will maintain its value as a real asset in an inflationary environment, and a sharp decline in prices is unlikely to occur. As for rental housing, there is room for yield improvement in urban areas as rents continue to rise. On the other hand, the supply-demand balance for rental housing in rural areas will inevitably ease as the population declines, and the challenges will be to address vacancies and improve the attractiveness of properties in order to ensure profitability. In general, the residential sector is expected to maintain its position as a stable asset over the long term, even as it undergoes price adjustments and a shift in demand toward urban pre-owned properties and new construction in suburban areas.
Outlook for commercial real estate: The commercial sector (offices, retail facilities, logistics, hotels, etc.) is likely to see a clear and sharp divergence in each sector. In the office market, rents are recovering in prime buildings in central Tokyo due in part to a return to work, although the impact of remote work taking root in the wake of the Corona disaster is being felt. Tokyo's office investment ratio is once again on an upward trend, recovering to account for 37% of total investment by 2024. In the future, corporate demand for office space will shift to emphasize quality and location, and companies will increasingly switch from old buildings to those with the latest facilities. As a result, the reconstruction and rehabilitation (including conversions) of older buildings will become even more important, and the trend in the U.S. and elsewhere of converting office buildings to residential buildings may attract attention in Japan as well. In the area of retail facilities, while the spread of e-commerce is creating headwinds for suburban stores, there are signs of a reevaluation of retail space in urban centers. The flow of people is returning to prime locations in central Tokyo, and investment will be concentrated in experiential, high-value-added stores. Conversely, suburban malls and other facilities that have become obsolete will likely face the challenge of changing their business formats and restructuring their tenants. In logistics facilities, there are concerns about rising vacancy rates in some areas due to the large supply that has continued over the past few years. Although demand for online shopping is expected to increase over the medium to long term, if the oversupply continues, rents may be adjusted, so logistics investments need to be selective. However, highly competitive properties such as advanced multi-tenant logistics and facilities with data centers are still considered promising. The hotel market is expected to continue to see high occupancy mainly in major cities and tourist destinations, driven by the recovery of inbound tourism. Foreign investors are also paying attention to Japanese hotel assets, and new openings and transactions will be active in this segment. In general, although there are shades of gray across sectors in commercial real estate, the strategy of focusing on quality assets and growth areas in urban areas will continue to be effective.
The above forecasts are based on the assumption that the current economic assumptions will not break down significantly. Specifically, we assume that the Bank of Japan will gradually normalize its monetary policy and that long-term interest rates will rise to around 2% over the next few years (in stages, without significant rate hikes). Under this scenario, while rising interest rates will exert downward pressure on real estate prices, economic growth and inflation will support an increase in rents and other net income, resulting in a gradual increase in both real estate prices and yields. In other words, we are shifting from a phase of "higher prices = lower yields" to a stable growth scenario where prices are maintained and slightly increase due to improved earnings. On the other hand, attention must be paid to the risk of economic recession. If there is a global economic slowdown or recession, real estate demand will temporarily cool down, and asset values may decline as rents fall and vacancies increase. In particular, under a recession scenario in which tenants' business performance deteriorates or bankruptcies occur one after another, price adjustments will be inevitable even for prime properties in central Tokyo. At present, however, there is an increasing likelihood that the U.S. economy will experience a soft landing (mild economic slowdown) and inflation will stabilize at a moderately high level. In that case, the prevailing view is that inflation will continue to support the real value of real estate in Japan as well, limiting the scope for a significant decline. In light of the above, it is important for owners to assess market trends from a medium- to long-term perspective, keeping both optimistic and pessimistic scenarios in mind.
Next, we will delve into the major macro and micro factors affecting the real estate market. Factors such as interest rate andinflation fluctuations, the development of new real estate tech (PropTech) technologies, and the growing awareness of ESG (environmental, social, and governance) issues and stricter regulations will have a significant impact on real estate values and investment strategies going forward.
As the Bank of Japan begins to shift its ultra-low interest rate policy, interest rates are expected to continue to rise moderately over the next several years. For property owners, rising interest rates mean higher borrowing costs and the risk of lower returns on leveraged investments. Even if the surface yield remains constant, if long-term interest rates rise, investors' expected yield (required rate of return) will increase, which may result in downward pressure on property prices. However, as mentioned above, the market is currently resilient to moderate increases in interest rates. In fact, in an environment where inflation continues to rise, the increase in earnings due to higher rents can be expected to have a supportive effect on prices. In fact, real estate tends to attract inflows of funds as an inflation hedge asset when inflation is high, even on a global scale. In short, it depends on the balance between interest rates and inflation. A slow rise in interest rates under moderate inflation can have a positive effect on the real estate market by "maintaining value through higher rents. On the other hand, an unexpectedly rapid rise in interest rates or stagflation (inflation during a recession) can have a damaging effect on the real estate market. It is important for owners to pay attention to the trend of monetary policy and prepare for interest rate fluctuation risk by reviewing the interest rate type of loan and making early repayments. They should also be proactive in taking advantage of opportunities to increase income, such as negotiating the renewal of fixed rent contracts, which are revised with a time lag under inflationary conditions.
In recent years, advances in information technology have brought a wave of digitization and efficiency to the real estate industry. The spread of new technologies known as real estate tech (PropTech), such as the digitization of contracts, online previews, and AI-based demand forecasting, is revolutionizing the operation of investment properties. The real estate tech market is growing rapidly, driven in part by the promotion of non-personal transactions in the Corona Disaster. According to forecasts by Yano Research Institute, the real estate tech-related market in Japan will reach 1,246.1 billion yen in FY2025, approximately double the current market size. Such technological innovation will be of great benefit to real estate owners. For example, smart building management using IoT and AI will enable energy efficiency optimization and predictive detection of equipment failure, thereby reducing maintenance costs and improving tenant satisfaction. In addition, rent setting and demand forecasting based on big data analysis can lead to shorter vacancy periods and more sophisticated leasing strategies. Furthermore, blockchain technology is streamlining contracts and registrations, and new financing and investment methods, such as real estate crowdfunding, are increasing liquidity while broadening the base of market participants. In the next five to ten years, these real estate technologies will further evolve and become an integral part of real estate value calculation and management operations. Owners must stay abreast of the latest technology trends and be proactive in incorporating them into their property management and investment decisions. Successful use of technology will be the key to differentiating their properties from the competition and enhancing profitability.
In recent years, environmental, social, and governance (ESG) initiatives have become important themes in the real estate industry. In response to climate change measures and the declaration of carbon neutrality, demand for buildings with high energy efficiency and real estate with low environmental impact has been increasing worldwide. In Japan, ESG-responsive real estate is also gaining attention as pension funds and institutional investors take a stronger stance on ESG investment. According to a survey by the Japan Real Estate Institute, 36.6% of surveyed investors have signed the PRI (United Nations Principles for Responsible Investment) as of 2024, and about 39.4% have participated in the GRESB (Real Estate Sustainability Assessment). In other words, ESG considerations are beginning to become the norm among professionals. It is interesting to note that 61.1% of investors expected that in 10 years' time, rental income would be 1-5% higher for properties with excellent ESG performance than for properties without such performance. Although the difference in rents between ESG and general properties is not pronounced at this time, this indicates that many market participants believe that green buildings will enjoy a premium in the future. Therefore, consideration of environmental performance and social value will be essential to maintaining and improving real estate value in the future. Specifically, energy-saving renovation of existing buildings (strengthening insulation and upgrading to high-efficiency air conditioning), introduction of renewable energy, fostering community with tenants, and strengthening disaster prevention and BCP measures, etc. Properties that are proactive in ESG are more likely to receive preferential financial treatment, including green loans from financial institutions. Property owners need to view ESG measures as long-term measures to improve asset value and enhance the sustainability of their portfolios.
Based on the above analysis, we summarize the strategic actions that owners of investment real estate should take over the next 5 to 10 years. Specific recommendations on how to prepare for uncertainties and how to seize growth opportunities are summarized below.
Periodic portfolio review:Dynamically reassess your asset portfolio in response to changing market conditions. Scrutinize the profitability and future potential of your holdings in light of interest rate trends and demand trends. As pointed out in the following section, it is necessary to review the current asset allocation in times of increasing uncertainty. For example, consider selling assets with significantly declining yields or properties in areas where demand is expected to decline in the future, and allocate the proceeds to sectors with growth potential (e.g., logistics facilities in central Tokyo or residential properties where demand is strong). It is important to optimize the portfolio by regularly taking inventory.
Regional and Use Diversification: Area andasset type diversification are fundamental risk hedging techniques in real estate investment. Since a concentrated portfolio is vulnerable to regional economic conditions and disaster risk, diversify your investments to different regions and uses. Specifically, consider not only properties in the Tokyo metropolitan area but also properties in core regional cities and major overseas cities, and incorporate multiple types of assets such as office, residential, retail, and logistics. For example, an owner with a high proportion of office space in urban areas can increase their resilience to changes in economic conditions and demand by investing a certain percentage of their assets in logistics warehouses and rental housing in rural areas. On the other hand, care should be taken not to over-diversify, which can increase the management burden, so seek a balance by consulting with your own management resources.
Value-add measures: Value-add measures are proactive measures to increase the value of existing properties. In order to create a strong asset that is less susceptible to market conditions, it is effective for owners to make their own efforts to increase the competitiveness of their properties. For example, if the property is an old building, the profit structure can be renewed through large-scale renovations or a change of use. For offices, changing the layout and enhancing common areas to meet tenant needs, and for residences, upgrading by remodeling and updating facilities can be expected to increase rents and improve vacancies. ESG measures mentioned above are also important to increase value. Investing in energy-saving renovations and tenant comfort improvements (air conditioning and air quality improvements, workplace environment improvements, etc.) can differentiate a property from its competitors. On the technology side, a series of small measures, such as installing smart locks and IoT sensors to improve convenience, will lead to long-term appreciation. In addition, when market conditions deteriorate, properties that have undergone value-up will have an advantage in terms of leasing and sales, which can also be a defensive measure. Owners themselves should have a creative perspective on increasing property value and actively work to maintain and improve asset value.
Review your financial strategy and financial plan: It is also essential to inspect your loan portfolio to prepare for rising interest rates and changes in the financial environment. If a large percentage of your loans are floating-rate loans, you are exposed to the risk of rising interest rates, so you should consider refinancing some of your loans to fixed-rate loans or increasing your dead equity ratio to reduce your dependence on loans. It is also important to secure liquidity on hand to prepare for promising investment opportunities. By procuring long-term funds while interest rates are low, or by selling unneeded idle assets to build up cash reserves, you will have the strength to pick up the price when the market declines. On the other hand, because market conditions are favorable at this time, you need to be flexible enough to lock in profits and replace your portfolio if there are assets that can be sold at a higher price. Consider long-term financing strategies, such as building relationships with financial institutions and securing lines of credit through multi-bank transactions.
InformationGathering and Expertise: Finally, in an increasingly complex real estate market, information strategy can make the difference between success and failure. Make it a habit to keep abreast of the latest trends by regularly reading domestic and international economic indicators and real estate market reports. For example, it is useful to regularly check important indicators such as vacancy rates, rent indexes, and cap rates. It is also wise to build a network with real estate brokers, asset management consultants, and developers, and actively seek out the knowledge of experts. Professionals working at the forefront of the market can provide valuable information, such as firsthand knowledge of each area and hints on which sectors to focus on in the future. In addition, actively experimenting with new real estate tech services (market analysis tools, property matching services, etc.) will give you an informational edge. Continuous learning and updating by the owners themselves is the key to long-term investment success.
Although the investment real estate market in 2025 is generally firm and favorable, it is important to develop a strategy that looks to the future, rather than settling for the status quo. Although the supply-demand balance is favorable and yields are stable at low levels, the market will be affected by a combination of factors, including rising interest rates, demographic changes, technological innovation, and ESG requirements. In particular, in a 5-10 year time span, there will be a clear divide between urban and rural areas, and between residential and commercial properties. In this environment, real estate owners must be nimble and adapt to changes in the environment, and make business decisions that balance risk diversification and the pursuit of opportunities.
Fortunately, real estate remains a promising asset class from a medium- to long-term perspective. Globally, the real estate market is expected to revive after 2025, and investment sentiment is also improving again. In the Japanese market as well, as long as economic growth and inflation remain supportive, there are expectations for a scenario of sustained moderate growth rather than a major collapse. The most important thing is for owners themselves to pay attention to market trends and implement proactive strategies. Take what preparations you can early on, such as adjusting your portfolio, taking measures to increase property values, and reviewing your financial plan. In addition, proactively embracing new technology and ESG trends can increase the competitiveness and profitability of your assets.
Real estate investing is a long-term game. The shortcut to success is to sit back and manage your assets without being distracted by short-term waves, but while remaining flexible and responsive to changes in the environment. Strategic actions as a real estate owner will make a big difference in the next 5 to 10 years. We encourage you to brush up your own investment plan with the contents of this article. Maximize the value of your valuable real estate assets through prepared management with an eye on the future.