Tourism boom drives Japan to convert offices into hotels

Record tourists to Japan are stretching the ability of hotels to accommodate them in a sector constrained by high costs, forcing developers to think out of the box for means to quickly increase lodging options without breaking the bank. Japan is on target this year to beat the record 13.4 million visitors in 2014, helped by a weak yen and easier visa requirements for some Asian countries. The government is aiming to attract 20 million visitors by 2020, when Tokyo hosts the Olympics, to revitalise the world's third-biggest economy.

The rising influx of tourists is already squeezing existing accommodation supply in Tokyo, which has about 100,000 hotel rooms. Just 7,600 rooms are scheduled to be added in the next three years, according to STR Global, a research firm for the hotel industry.

The slow pace of growth is due to rising land prices and construction costs. One quick solution: convert old office buildings into hotels with tiny but stylish rooms that can rent for under $30 a night, less than half the rate for a cheap business hotel.

"Converting an office building into a hotel is an ideal way to respond to the immediate need for hotel rooms," said Yukari Sasaki, senior managing officer at property developer Sankei

Building Co. "Building a hotel from scratch costs too much money now because of high construction costs."

Sankei, a unit of Fuji Media Holdings Inc, which owns the conservative Sankei newspaper, converted a 35-year-old office building in Tokyo's electronics-geek district of Akihabara into a hotel in under a year and for less than $8 million. The hotel, called Grids, charges 3,300 yen ($27) a night per person for a bunkbed and up to 5,000 yen ($40) for premium rooms with tatami mats. By comparison, the average room rate at Tokyo's lowest-ranked business hotels has risen 11.7 percent from a year earlier to 9,500 yen, according to STR Global.

"The market for this type of hotel is still tiny, but it has potential to grow bigger in major cities where hotel demand is strong," said Tomohiko Sawayanagi, managing director for Jones Lang LaSalle in Tokyo.

Also, as more office towers are being built, older and smaller office buildings become less attractive. Such properties could be better used as hotels, industry people say.

Last year, B-lot converted a 28-year-old office building near Tokyo's popular Tsukiji fish arket into a hotel called First Cabin, where 5,500 yen will get you a "business-class cabin" with a single bed. Another 1,000 yen buys you space to open a suitcase. In March, B-lot sold First Cabin to Hong Kong-based property investor SIS International Holdings Ltd, and is now converting a 30-year-old office building in Shinjuku, a popular destination for Asian tourists, into a bunkbed hotel. Competition will come from the likes of home rental website Airbnb, which has listed thousands of properties, even at the risk of running afoul of the law.

Current regulations on short-term rentals are strict: owners are not allowed to legally let their homes without a licence, hotel-style reception desks and minimum room sizes.

But there is hope. As part of Prime Minister Shinzo Abe's economic growth strategy, his government has designated special zones across the country where a range of regulations will be eased, including laws related to short-term lodging. In the meantime, property developer Sankei plans to convert more office buildings into low-end hotels. Its Grids property in Tokyo is slated to be torn down eventually to make way for an apartment building. "But if tourism is still booming, we may rebuild it as a new hotel," Sankei's Sasaki said.