Welcome to the fourth edition of the Savills Japan Monthly-ish Opinion Letter.

As we progress through the latter half of summer, Japan’s real estate market continues to navigate a mix of persistent cost pressures, selective capital deployment, and evolving sector-level growth stories. Recent appraisal request trends provide a clear snapshot of investor priorities, highlighting where capital is flowing, how acquisition and operational models are evolving, and which asset classes are benefiting from structural shifts in demand.

While global macroeconomic headwinds including monetary tightening, inflationary pressure, and geopolitical uncertainty remain, Japan continues to stand out for its political stability, transparency, deep liquidity, and relative currency advantage. These strengths have helped sustain transaction activity and keep investor interest steady, even as strategies become more selective. Notably, inquiries and valuations are still trending higher, demonstrating the market’s resilience.

Investor Sentiment: Stable but More Targeted

Institutional and cross-border capital remains active, though deployment is increasingly strategic. Investors are gravitating towards thematic plays tied to demographic trends, e-commerce growth, inbound tourism, and digital infrastructure.

The weaker yen continues to provide a compelling entry point for international investors, while some domestic managers backed by global capital are also competing aggressively for prime opportunities. The unifying theme across many transactions is targeted competition for assets with clear internal growth potential, even if achieving that growth requires higher operating costs, complex repositioning, or longer timeframe.

Sector Snapshots: Insights from Appraisal Activity

Residential: Strong Demand, Shifting Focus

Investor focus has moved from cap rate compression to rental growth as the main driver of performance. Rising construction costs have encouraged value-add strategies, including acquiring older stock for refurbishment to achieve higher yields. Forward-commitment deals for rental apartments keep increasing, supported by strong leasing fundamentals and limited availability of prime stock. Operating costs, including property management fees, are trending higher, requiring more disciplined underwriting.

Outlook: Rising condominium prices will continue to push demand towards the rental sector, intensifying competition for quality assets.

Logistics: Strategic Hubs and ESG-Driven Renewal

Logistics appraisal activity surged during the pandemic, slowed by 2024’s trucking labour issues, and is now growing. Demand is concentrating in strategic relay-transport hubs that support efficient national distribution networks such as Kanagawa, Shiga, Okayama, and Hiroshima. ESG-driven replacement of older facilities with newer, more sustainable stock is accelerating, often with improved automation and energy efficiency.

Outlook: Large investment sizes and ESG compliance will remain central to capital allocation decisions.

Office: Rapid Recovery in Core Locations

While the office sector’s recovery has been slower than some asset classes, conditions in prime urban locations are rapidly improving. Occupancy is tightening in well-connected areas, though fringe and bayfront markets with weaker access still face challenges. Investors remain cautious, but interest is rising in assets with rental upside, particularly where repositioning, flexible configurations, and upgraded amenities can capture tenant demand.

Outlook: Leasing momentum in core markets is likely to lead investment activity, favouring central, accessible buildings.

Hospitality: Repositions to Capture Tourism Growth

Hospitality appraisal requests are increasing, driven by inbound tourism recovery and the yen’s currency advantage. Many projects involve repositioning underutilised assets, such as expanding room sizes for group travellers, converting residential stock into apartment hotels, or switching operators to brands with stronger market reach. Tight development pipelines and high construction costs are keeping investors selective, with growing interest in regional markets with untapped tourism potential.

RevPAR and ADR continue to rise, but as absolute levels have become elevated, growth rates are showing signs of tapering, a trend that showcases the need for more strategic revenue management and asset positioning.

Outlook: Overtourism in popular destinations could boost demand for differentiated and higher-value hospitality formats.

Data Centres: Institutionalising at Scale

Data centres are moving from niche to core allocations for institutional investors. Appraisal requests are rising for both development and acquisition opportunities, with a shift from core-shell models to full-fit facilities where owners control critical infrastructure. Multi-tenant collocation models are gaining traction, diversifying risk and enhancing leasing flexibility. These projects are typically large, ranging from JPY20 billion to over JPY100 billion, and require significant equity commitments and long planning horizons.

Outlook: Leasing fundamentals and control over infrastructure will be key drivers of valuations as the sector matures.

Senior Housing: Stable Demand with Operational Complexity

Japan’s ageing population continues to support strong demand for senior housing, but rental growth is limited by social security-linked revenue structures. Investors are pursuing portfolio aggregation strategies to achieve scale, while addressing operational challenges such as labour shortages, automation adoption, and care quality. Higher financial and operational costs are putting pressure on fixed contracts.

Outlook: Stable cash flows are attractive to long-term capital, but operational efficiency will determine success.

Conclusion

Japan’s real estate market remains anchored by stable fundamentals, even as competition becomes more selective. Appraisal trends point to strong interest in sectors with structural demand drivers, especially residential, logistics, hospitality, and data centres, where internal growth is achievable despite higher complexity.

While macro factors such as interest rate shifts, inflation, and policy adjustments will require close monitoring, Japan’s depth, transparency, and breadth of opportunity continue to set it apart in the Asia-Pacific region. For investors willing to adapt strategies to sector-specific realities, the second half of 2025 offers a range of compelling prospects.