Why 2023 was a banner year for Japanese hotels

Domestic travel has remained strong over the last four years despite COVID. According to the JTB, domestic travel has historically been 72% of all travel in the country. Travel from Korea is driving international demand with the country representing 27% of arrivals over the past year. Visitors from mainland China continue to lag historical numbers, but the JTB is forecasting an 80% recovery by the end of 2024 and a full recovery by 2025. 

The weak Yen also helped boost foreign visitor spending, which set a record of JPY 5.3 trillion ($33.28 billion) in 2023.

Influx of foreign visitors

Japan’s many foreign visitors and durable domestic demand have significantly increased ADRs across all cities and categories. STR data shows that ADRs reached JPY 18,403 as of February 2024, which is 35% higher than the same period of 2019. With current forecasts expecting the Yen to strengthen in the second half of 2024, CBRE expects ADRs to continue to grow for the rest of this year.

Despite the influx of foreign visitors, Japanese hotel operators continue to adopt a rate-driven strategy. Hotel occupancy is down 11% through February 2024 (compared to the same period in 2019), but CBRE expects that number to continue increasing throughout the year.

Unlike other markets in Asia Pacific, demand for business and city hotels has outpaced other segments in Japan. According to the JTA, international demand for business locations in Japan increased by 20% for February 2024 compared to the same period in 2019. Domestic demand rose by 1%, with international demand up 12%. CBRE expects business hotels to be the top-performing segment in 2024, with leisure hotels expected to maintain modest performance growth this year. 

New room supply

Although investor interest in Japanese hotels has increased considerably over the past 18 months, investors have been cautious about committing capital to new constructions because of increased costs. Turner & Townsend data shows construction costs for commercial real estate are expected to increase in Toyko by 24% over the next two years, the second highest increase in Asia Pacific behind Singapore. As a result, new hotel supply in Japan is set to grow by just 0.4% over the next three years, down from the 10-year average of 3.7%.

According to STR data, 75% of all new hotel supply in Japan in the next four years will be in the upscale+ segment, which will comprise 40% of available rooms in Japan in 2023.

Hotel investment

Japan’s hotel investment surged in 2023, surpassing JPY 500 billion, a 240% increase over 2022 and 4% higher than 2019. Cross-border investment hit JPY 240 billion and accounted for 46% of all hotel investment, the highest proportion since 2007.

The luxury and upscale segments will continue, and they will be popular with investors in 2023 and should continue to grow over the next year. Because of its affordability compared to other markets in the region, luxury continues to be the consumer’s preference in Japan, and that trend is expected to continue in the near future. 

Despite Japan’s recent hike in interest rates, it remains attractive to investors. And even with the potential narrowing of yield spreads, the report says there is still significant dry powder targeted for Japanese real estate, which should limit the potential impact of the country’s monetary policy.

CBRE data also shows NOI yields for hotel assets in Japan ranging from 4.3% to 5.3%, and the report says overall yields for hotel assets in the country should remain stable over the next 12-24 months. 

Click here for a copy of the report.