HENDERSONVILLE, Tennessee—During the past two economic recessions in the U.S., as hotel demand declined total supply growth also receded. However, with the current downturn, total hotel supply has been growing steadily as demand has been diving deeply to levels below the prior two recessions.
July year-to-date overall supply growth has had nominal or flat growth levels from 2004 to 2006. In July 2007, year-to-date supply grew 1.1 percent, rising to 2.3 percent the following year. As of July 2009 year-to-date, supply has flattened at a 3.2-percent growth rate, settling at an average of 4,771,229 rooms available for sale per day in the U.S.
Since 2000, hotel closures spiked at 845 properties in 2005. But since that peak, hotel assets have been retiring at a slower rate. In 2007, 352 hotels closed, which was half the number of hotels that closed in 2006. As of July 2009 year-to-date, only 38 hotels have closed versus the 113 that closed at the same point in 2008.
When drilling down to see what types of hotels have been closing throughout the years, the independent properties have represented the lion’s share of retired assets. From 1999 to 2008, independent hotels represented 65 to 87 percent of all hotel closures. The next most frequent closures are branded economy hotels, which ranged from 5 to 22 percent of total hotels closed, and midscale-with-food-and-beverage hotels, which ranged from 6 to 12 percent of closures.
This year, the trend in hotel closures shifted. As of July 2009 year-to-date, independent hotels consist of only 43 percent of total hotel closings, versus economy at 35 percent and midscale with food and beverage at 28 percent. Although the number of hotels that closed this year is only 38 (versus the 113 closures at the same period last year), the pace of independent hotel closures has slowed greatly.
Hotels in the U.S. typically close because of a more profitable use of the asset/real estate. Examples for other uses include conversion to timeshare/vacation ownership use, condo-hotel use, or demolishing the hotel for nonlodging/housing-related use (e.g., office building).
Many older economy, midscale-with-food-and-beverage and independent hotels have no debt service. Although their owners may depend on cash flow, those properties aren’t as fiscally constrained as their newer-market competitors.
During these economic times, commercial real-estate values have become depressed, and there are fewer—and some would argue no—better, profitable uses for those hotels’ real estate. These days, keeping old hotels open, even at significantly low occupancy levels, allow those under-retired hotel assets to provide a revenue stream because there are limited profitable uses for the real estate.