CBRE releases 2020 Japan Hotel Market Outlook

Tokyo, Osaka, Kyoto: Number of Hotel Rooms to Rise 38% by 2020

Hotel Room Shortage Remains in Tokyo's 23 Wards; Little Risk of Oversupply in Osaka and Kyoto

CBRE today released a report titled, "Japan Hotel Market Outlook – Room to Grow; Hotel Demand Expected to Keep Pace with New Supply". The report summarizes the outlook for the hotel market and recent supply trends in Japan's eight major cities (in descending order of size): Tokyo, Osaka, Kyoto, Sapporo, Sendai, Nagoya, Hiroshima, and Fukuoka.

Summary

• Hotel development has been boosted by growing inbound tourism and rising average daily room rates. In the three major markets - Tokyo, Osaka, and Kyoto - the number of hotel rooms is expected to increase by 38% between 2017 and 2020.
• The hotel market reached a turning point at the start of 2017. Revenue per available room (RevPAR) growth in the eight major cities had slowed down since 2016 and turned negative in Osaka in February 2017(*1). This was due to the rapid rise in room rates, an increase in new supply, and a greater variety of lodging options, including vacation rentals and hostels.
• Tokyo is forecast to remain tightly supplied, with a shortfall of around 3,500 rooms. Although Osaka and Kyoto will see the addition of more rooms than what was estimated to be needed, the new supply is likely to stimulate latent demand or recover demand which to date had been lost to other areas.
• New supply is skewed towards limited service hotels, which would account for more than 90% of new supply in the eight major cities. Of these limited-service hotels, at least 50% will be business hotels.

Hotel development boosted by growing inbound tourism and rising average daily rate (ADR)
CBRE forecasts that 80,000 new hotel rooms will open in Japan's eight major cities by the end of 2020. This new supply will increase the existing stock of hotel rooms as of 2016 by 32%. In the three biggest cities - Tokyo, Osaka, and Kyoto - new supply is expected to equal 38% of existing stock. This increase in new supply is being driven by steady growth in hotel earnings, thanks to the rise of inbound tourist demand. In 2015, when tourist arrivals surged, hotels' RevPAR rose by a national average of 14.8% y-o-y (*1).

Wider choice of lodging brings the hotel market to a turning point
RevPAR growth in the major cities has been slowing since 2016 and in fact turned negative in Osaka in February 2017 (*1). The weaker growth has been due to: 1) some business customers avoiding hotels due to an increase in ADR; 2) stiffer competition resulting from new supply; 3) a wider choice of lodging types such as vacation rentals and cruise ships, and budget accommodation such as hostels.

Hotel market in 2020: shortage of rooms in Tokyo; supply to outstrip demand in Osaka and Kyoto
The Japanese government has targeted 40 million inbound tourists by 2020. CBRE estimates that there is a shortfall of around 3,500 rooms in order to match this target, even when considering the expected-increase of new supply. On the contrary, for Osaka, there is an excess of 13,500 rooms versus required rooms, and in Kyoto, an excess of 11,300 rooms. However, the fact that the existing number of rooms is likely to exceed estimated requirements does not necessarily indicate oversupply. In Kyoto, it is likely that demand subsided because of a shortage of rooms. A rise in supply may therefore prompt an increase in demand. In Osaka, CBRE found that demand for rooms was discouraged or lost to other cities, as a result of higher occupancy rates which made it difficult to secure a reservation. However, as an increase in supply will resolve the shortage of rooms, demand is likely to recover.

As demand diversifies, what will travelers look for in a hotel?
Accommodation needs will be redefined by consumers' preference for experiences rather than goods. With 90% of new supply consisting of limited-service (*2) hotels, of which 50% comprise of business hotels, new hotel supply in Japan’s eight major cities is clearly unbalanced. Hotels seeking to remain competitive must respond to tourists’ changing preferences and increasingly diverse requirements. Ultimately, hotels will need to improve the quality of lodging experience, rather than solely provide a place to stay.

(*1) Source: STR
(*2) Limited-service hotels provide lodging with minimal additional facilities. Full-service hotels provide accommodation along with restaurants, banqueting services, gyms, spas, and concierge services.

The full report can be downloaded at:
https://www.cbre.co.jp/en/research-reports/other-reports.

ABOUT CBRE HOTELS

CBRE Hotels operates globally and leverages local market knowledge and expertise to provide specialist advice to investors, financiers, operators, and developers in the hotel sector. Our services include acquisitions and dispositions, operator selection and contract negotiations, feasibility study, and market research. We consult on hotels, resorts, covering all major cities and tourist destinations in Japan.