2020 was a year of high hopes for the Japanese hospitality market. Emboldened by the Tokyo Olympics and the rapid growth of tourism since 2013, the national government had originally aimed for 40 million overseas visitors for the year. These hopes have undoubtedly been dashed by the COVID-19 pandemic, with just four million visitors entering the country in the fi rst half of the year – a 76.3% decline over the fi rst half of 2019. As would be expected, the vast majority of these visitors entered the country in January and February, prior to any signifi cant border closures, with only 2,600 recorded entries in June. Indeed, Japan is eff ectively as closed off as it was during the isolationist Edo Period, creating an unprecedented challenge for hoteliers.

Moreover, with record room supply entering the market in 2019 and 2020, the COVID-19 crisis has arguably come at the worst possible time (Graph 2). Soaring inbound tourism and the upcoming Tokyo Olympics prompted a spate of new developments from 2017 to 2020, mostly in the budget and limited-service hotel subsectors. Fortunately, supply looks set to cool signifi cantly in 2021 and beyond. Operators capable of weathering the storm until then may fi nd themselves in a more advantageous position when the dust settles.

• After eight consecutive years of growth, the number of overseas tourists is fi nally set to see a contraction in 2020, with only four million visitors entering the country in the fi rst half of the year.
• Prompted by the Olympic tailwind, record supply is expected for 2020. Fortunately, new supply will cool signifi cantly in 2021 and beyond.
• Domestic travellers accounted for 84% of overnight stays in 2019 and their spending has trended upward.
• Unemployment in Japan remains among the lowest in the world, meaning local residents still have some spending power to travel domestically.
• J-REIT price performance indicates divided sentiment within the hotel sector, with more upmarket hotel REITs outperforming those with a heavier reliance on limitedservice hotels.
• Occupancy has fallen to the 20-30% range, while ADRs have compressed to less than half of what they were pre-COVID. Rural and suburban hotels are performing markedly better than their urban counterparts.
• Hotel investment volumes for 1H/2020 fell 19% YoY to around 214 billion yen. While this is a relatively modest drop considering 2019’s recordhigh investment into the sector, volumes appear to have been supported by existing commitments entered into prior to the pandemic.