The 2007 problem: Tokyo's hotel market near saturation.

The Tokyo hotel industry is facing a crisis dubbed by the blogosphere the "2007 Problem," in short, the entry into the market of a slew of luxury hotels by the end of 2007.

In 2003 Tokyo saw the Grand Hyatt Tokyo (Roppongi), Strings Hotel Tokyo (Shinagawa), Royal Park Shiodome Tower, and the Park Hotel Tokyo (Shiodome) open. They were followed this year by the Tokyo Prince Hotel Park Tower (Shiba Koen), Conrad (Shiodome) and the Mandarin (Nihonbashi). Due to open in 2007 are the Ritz-Carlton (Roppongi) and The Peninsula (Yurakucho). All are so-called five-star hotels.

There are two reasons luxury foreign hotels are entering the Tokyo market. One is that a growing number of foreigners are visiting Tokyo. The other is that the decline in land prices and the redevelopment of Roppongi, Shinagawa, Shiodome, and Nihonbashi (in that order), has attracted luxury accommodation hotels as core facilities that can energize these downtown locations. Developers prefer mammoth hotels for their array of leisure facilities besides accommodation.

Explains Dylan Robertson, a senior associate at CBRE Consulting in Tokyo, "In terms of total net leasable land within large-scale mixed-use area redevelopments, such as Roppongi Hills and Tokyo Mid-town, office space is the largest component and therefore the most important rental income stream. In order to draw top-tier, blue chip corporate tenants that will pay the highest rents, developers seek to surround the office towers with facilities that will appeal most to their tenants and raise the image of the development." Nothing boosts a development's image like a five-star hotel with a global brand.

Developers have a further reason to lure luxury hotels: they are magnets for the jet set. More than dropping money in the development's restaurants and shops, these high rollers know this as the place to be. Regular Joes and Janes come to bask in the stardust.

Robertson offers the Mori Building Co.'s Roppongi Hills as an example. "The Grand Hyatt is where all the big Hollywood movie stars stay and launch parties for their new movies. Big hitters from the investment banking and corporate worlds stay there to visit not only the offices of corporate tenants in Roppongi Hills, but also anyone in Tokyo. The site becomes frequently featured in the media and TV shows. Tourists and locals come to see what all the fuss is about." Robertson points out that although Roppongi is inferior to Marunouchi in access, its residential rents are comparable. "The high rollers and the senior executives who make decisions on the location of their firm's office don't care because they never use trains or subways--they are just looking for a central location and Roppongi is very central in Tokyo."

Concern for an over supply of five-star hotels has been widespread for some time now. Before the tsunami of foreign luxury hotels hit Tokyo, the city had 35,000 hotel rooms. That figure will grow to 40,000 in nearly one fell swoop. Moreover, recently opened hotels are all first-class waterholes charging 30,000 to 40,000 yen per night. It is as clear as day that there will be too few people with the discretionary income to lodge in these up-market caravansaries. True, a good portion of the 200 million Chinese expected to travel overseas for pleasure by 2015 will visit nearby Japanese shores. In 2003 the average per capita disposable income was $1,033 in cities and $319 in rural areas, according to Asia Times. One wonders whether by 2015 it will have risen to where a significant number of Chinese can afford to pay what would now be nearly a third of their annual income for a night's stay in a hotel.

The Imperial and the Okura, traditionally regarded as Tokyo's top hotels, are preparing to counter the foreign competition. Both have increased the exclusive floor space per room to boost the feel of luxury. The Imperial inaugurated its first major renovation in 15 years according to the Nikkei. In the spring of 2005 Tokyo's most well-known hotel completed the transformation of its 14th, 15th, and 16th floors into "Imperial Floors" fit for a king. Meanwhile the Okura has allocated 11.5 billion yen for a six-year-long makeover scheduled for completion in 2008.

Both have several reasons to fear competition from high-end foreign hotels.

The principal strength of the newcomers is the advantage conferred by a pre-existing quality service program tried and tested in the reception of movers and shakers in the world's principal cities. In other words, even Tokyo's best are bumpkins by comparison.

Underwriting this five-star service is a further strength of luxury foreign hotels--their delegation of authority. Japanese hotels remain bastions of authoritarianism. The boss has a grip on authority and won't let go. If the site staff has not been delegated authority, guests are often made to wait. This is not the case at foreign luxury hotels, where staff can make on-the-spot decisions that forestall guests' being kept waiting.

Mitsuyoshi Horaguchi, a professor at Musashino University, relates this story. A bell girl at the Ritz-Carlton Hotel in Osaka took the wrong baggage from the cloakroom. While she rectified the mistake, the guest cooled his heels in the lobby. Afterwards she dashed to the cake shop and purchased a 5,000-yen cake and had it gift-wrapped. She presented the cake to the irate guest as a token of apology. You would not witness such a scene at a typical Japanese hotel, emphasizes the professor. At a Japanese hotel the bell girl would have had to seek her boss's approval to buy the cake--and in the interim the guest would have become more irate.

A further strength of foreign hotels is encapsulated in the oft-heard expression "the sign is a human." This contrasts with the thinking at Japanese hotels, where setting up direction boards is regarded as customer-friendly. At foreign hotels the man is the sign, and he will walk with the customer a minimum of three meters. This sort of thing, clearly stated in the hotel manual, is carefully put into practice.

The great wave of hotels will, according to the professor, call for an additional 1,500 hotel employees annually as new mega-facilities open. The best hotel men and women are being head hunted. Young people no longer believe they will enter a company and remain there for the rest of their lives. If one hotel offers better conditions, they will not hesitate to jump ship. Even if they should, say, enter the Mandarin, after they've three years' experience under their belts, they may aim to become concierge at the Peninsula.

With Japan's population in decline, Japan's top-end hotels will be hard-pressed to attract the cream of English-speaking young people, who will gravitate to the glamour of global-brand hotels. With the increasing mobility of employment, young people of ability will have the chance to make great leaps forward, and increasingly they will be leaping to luxury foreign hotels.

Tokyo's up-market hotels will be lucky to keep five stars.

RELATED ARTICLE: Japan's Best Hotels (2006)

1. The Ritz-Carlton Osaka

2. The Imperial Hotel Tokyo

3. Park Hyatt Tokyo

4. Hotel Okura Tokyo

5. Four Seasons Hotel Shunsanso Tokyo

6. Westin Hotel Tokyo

7. Grand Hyatt Tokyo

8. Riga Royal Hotel

9. Pan Pacific Hotel Yokohama

10. Conrad Tokyo

Source: Shukan Diamond.