2024 Hotel Boom: Mixed Feelings in the Latest Real Estate Market.

The new year has begun with a sense of uneasiness, with a major earthquake and a serious accident at an airport, but we would like to consider how the real estate market will develop this year.

Land prices are expected to rise, especially in four regional cities

First of all, public land prices are announced in March. This is data on nationwide land prices as of January 1 of each year, and land prices are expected to rise further nationwide. Land prices in the three major cities (Tokyo metropolitan area, Osaka City, and Nagoya City) are expected to show high increases of 3-5% for residential land and 4-6% for commercial land. In particular, commercial land prices may exceed expectations, as evidenced by the full-fledged recovery from the COVID-19 crisis. It is also imaginable that land prices in the four fast-growing regional cities (Sapporo, Sendai, Hiroshima, and Fukuoka) will rise at a rate of about 8-9% for both residential and commercial land.

As long as land prices continue to rise at a steady level, they should be welcomed as a sign of economic revitalization. However, in the real estate market, there are also concerns emerging, particularly regarding the recent sharp increase in construction costs. According to the Construction Work Cost Deflator announced by the Ministry of Land, Infrastructure, Transport, and Tourism, as of July 2023, the index for housing complexes and reinforced concrete construction, equivalent to apartment building, is 124.5 based on the 2015 standard (index = 100). This indicates a significant increase since the beginning of the COVID-19 pandemic in February 2020 when the index was 108.0. In practical terms, this represents a rise of 30% to 40%.

Negative impact concentrated on those considering sub-urban homes and amateur investors

This event has had a significant impact on the housing market. Since the end of the Corona, only high-priced properties have been selling. Sales prices of new condominiums in the suburbs, as well as in the city center, have skyrocketed, and the number of properties that are selling slowly is increasing. On the other hand, the wealthy who purchase expensive properties in central Tokyo can afford to absorb the price hikes, and for those who buy for investment purposes, the price only needs to rise as long as the property is sold in a short period of time, and for those who buy for inheritance purposes, the high sales price is of little concern.

In the case of detached houses, the reason why inventories are piling up in suburban areas where they could have been acquired at low prices is that the cost of land and buildings has skyrocketed, making them unaffordable for the general public.

This trend is expected to continue this year, but if the short-term prime rate, which is the standard interest rate for mortgage loans, increases during the year, it is likely to have a significant impact on the real demand segment, such as power couples who had managed to purchase new condominiums on the assumption that interest rates would be low.

The popularity of townhouses in the bay area, Musashikosugi, and redevelopment properties in front of Tokyo’s terminal stations, where investors have few purchases and actual demand is all over the place, may be overshadowed by the popularity of townhouses in these areas. In such an environment, the impact on downtown area townhouses, where investment demand is expected to be strong, is expected to be limited.

Furthermore, there is a risk that this year will see a combination of selling by investors who have given up on the real estate market, which has been enjoying a strong performance for about 10 years, and are looking to sell once and lock in profits. This is because investors are very sensitive to interest rate movements. A change in policy rates, i.e., an increase in interest rates, will trigger a drop in real estate prices, creating an incentive to exit early.

The investment environment can change dramatically overnight, as it did during the Lehman Shock. In this sense, the more serious investors know where the party will end, the faster they move. And amateurs who invest without thinking and with only the simple motivation and desire to do so, “because everyone else is doing it” may have an opportunity this year to get stuck in a bottomless pit.

Declining average rents in the office market and inbound sales are the keys to success for retail facilities

The office market is still in a high state with the average vacancy rate in the five wards of central Tokyo hovering around 6%, but there is little supply of large buildings this year. Although it will depend on economic trends, we expect a lull to continue as a certain number of office floors are expected to be leased back after the COVID-19 crisis. However, there is limited demand for new tenants, and many of the tenants of new office buildings recently completed tend to compensate by pulling out tenants from surrounding buildings and developers’ existing buildings, so the problem of secondary vacancies occurring in buildings that have been pulled out will become more pronounced. The decline in average rents is not expected to stop this year, as tenants continue to lower the rent levels they are offered, or lower real tenant rents by waiving rent for a certain period of time (free rent) without changing the surface rent.

The commercial facility market is likely to be active, especially for high-end products for the wealthy and for facilities targeted at inbound demand. Department stores in major cities are recovering rapidly, as if their recent slumps were a lie. In addition to the rapid increase in the number of wealthy people in Japan, the number of inbound shoppers has also been on the rise, as customers with more money than the Japanese are buying jewelry, luxury watches, and other items.

Soaring prices also have the effect of increasing supermarket sales. A series of price hikes in food and other commodities, which had previously been all about price reductions, has led to an increase in sales. However, the general public is expected to become more thrifty in their wallets in the future, as they are wary of higher social insurance premiums and tax hikes. Commercial facilities that handle commodities are being questioned as to whether they can absorb the rising costs of labor and facilities, and this year’s market will not allow for optimism.

The sector expected to be the most thriving this year is the hotel industry

The real estate sector with the most promising outlook is the hotel industry. Recently, the presence of foreign tourists (inbound) has been noticeable not only in urban areas such as Tokyo, Osaka, and Kyoto but also in regional cities and resort areas. This is evident from the fact that the inbound number for 2023 recorded 22.33 million people from January to November. It is likely that the total for the year 2023 will reach around 25 million, nearly 80% of the level in 2019. The recovery of domestic travelers is also remarkable. The cumulative number of lodgers from January to October 2023 is approximately 398.76 million, nearly on par with the same period in 2019 (417.22 million).

This trend is expected to strengthen this year. It is not only numbers. The hotel occupancy rate is on the rise, and the industry is enjoying a winning pattern of not only higher occupancy, but also higher unit prices. The number of inbound travelers this year is expected to be around 35 million, up from 31.88 million in 2019.

In summary, the real estate market in the coming year is at a turning point, as it continues to recover from the impact of the COVID-19 pandemic and enters a potentially more active phase. The key factors to watch include whether the recovery momentum will persist, the effects of interest rate hikes with wages struggling to catch up, the impact of inflation on consumer spending, and the potential for an increase in office vacancies and housing inventory. Attention should be focused on wage increases, including those from the spring labor negotiations in April, and the monetary policy decisions of the Bank of Japan.

Tomohiro Makino graduated from the University of Tokyo with a degree in Economics. After graduating, he joined Dai-Ichi Kangyo Bank (now Mizuho Bank), worked at Boston Consulting Group, and was with Mitsui Fudosan before joining Pacific Management in 2005. In the same year, he became the President and Representative Director of Pacific Commercial Investment and later served as an executive officer at Japan Commercial Investment Corporation. In 2009, Makino founded Office Makino Co., Ltd., where he currently serves as the Representative Director. Additionally, he is the Representative Director of Olaga Research Co., Ltd., established in 2015, overseeing total production from planning real estate business to execution and operational management. Some of his notable books include “Real Estate Hell: The Burden of Inheritance” (Bungeishunju), “Tokyo in 2030” (Shodensha, co-authored with Masashi Kawai), and “The Future of Real Estate: Prepare for the Era of Home Transformation” (Asahi Shimbun Publications).