Japan hotel performance beginning to blossom

In Japan, the cherry blossom is in full bloom, providing spectacular sights in cities and signaling the arrival of warmer weather. Known as Sakura, these trees also provide the perfect metaphor for the country’s hotel industry, which is beginning to show reasons for optimism after a later reopening than many parts of the world.  

Japan’s recovery is moving in the right direction as the current central administration continues to focus on growing both domestic and inbound tourism as well as experiences in the country, resetting the agenda for rapid growth in international arrivals. 

Tourism hopes to warm up Japan’s hotel performance

In the final two months of 2022, Japan’s hotel performance surpassed 2019 levels, first with average daily rate (ADR) in November followed by ADR and revenue per available room (RevPAR) in December. In the first two months of this year, those metrics began to soften although we anticipate higher levels throughout the season following the current tourism growth trends.

Much like other markets around the world, there is a noticeable difference in Japan’s high-end properties, which have recovered to 2019 rate levels. Other hotel classes, on the other hand, remain behind historical highs. The luxury segment in many other countries has far surpassed 2019 levels, often by as much as 20% even when adjusted for inflation. In Japan, however, growth is still moderate as luxury and upper upscale hotel ADR finished 2022 at 5% above the pre-pandemic comparable.  

International brands in Japan quickly capitalized on the reopening of borders, and as hotel room rates increased more rapidly, so did flights to key hub cities. During the pandemic, Japanese brands were generally seeing stronger rate growth as domestic travel prevailed, but in December and continuing into Q1 2023, international brands are growing rates faster. Tokyo is a good example of that growth.  

The first quarter of 2023 has shown continued growth, particularly from mid-February onwards and until the end of the fiscal year, driven mostly by growing hotel rates up until this popular tourist week when the trees are in full bloom. 

Fresh winds hope to push Japan forward

As international brands and owners are competing more with traditional domestic operators, questions linger about confidence in increasing hotel rates further and operational profitability. As in most Asia Pacific markets, the lack of large, wide-body aircraft and seat capacity continues to restrain recovery, keeping supply low and flight prices high, but also extending into staffing across the entire sector.

Logistical complexities are expected to subside in due course, which will hopefully occur before the Chinese outbound market fully kicks in again. For reference, in 2019, approximately 10 million of the unprecedented 32 million arrivals to Japan came from China. Even a portion of the revival of such volume adds substantial expectations on airlift and travel hubs’ ability to manage successful experiences. 

As for more advancement, international demand is returning quickly, and pent-up interest in the country remains high. The Japanese yen remains undervalued for the ‘dollarized’ community, making the country more affordable, which aligns with the fact that hotel rates have risen less than elsewhere post-COVID. But inflation remains comparatively muted, and Japan remains one of the hottest markets in the region long-term, both for investment and tourism. 

Looking beyond the bloom

Tokyo hotel performance is expected to come close to 2019 levels by the end of this year and show inflation-adjusted growth by 2024, as the new hotel pipeline remains reasonably balanced compared to existing supply, especially when compared to markets in Asia as a whole. 

GOP Margins remain much lower in Tokyo compared to 2019, as line items such as utility and labor costs continue to re-balance total revenue growth. Before conventions, groups and a bigger F&B venue spend can adjust the balance sheets, hotel operators across Japan continue to seek efficiencies across departments, particularly in Tokyo, Osaka, and Kyoto, where the dependency on international travelers had built up. 

The Bank of Japan continues to maintain low-interest rate targets compared to many other countries, and while the cost of debt is to some degree still affecting transactional volumes and the gap between buyers and sellers remains large, Japan remains one of the most attractive investment destinations in the region for most asset classes, including multi-family, offices and hotels.