Operators unconcerned by supply upticks
Operators unconcerned by supply upticks
24 DECEMBER 2013 9:52 AM

While talk of new development is coming up more frequently in conversation, sources aren’t worried about any near-term negative impact on the global hotel industry.

GLOBAL REPORT—These are feel-good days in the global hotel industry.

Global regions for the most part continue to show monthly gains in the key industry metrics of occupancy, average daily rate and revenue per available room. Values are on their way up. The investment scene is percolating.

With all this good news surrounding the industry, it’s natural for hotel operators to take a peek into their rearview mirror to see who else might be joining the race.

Data compiled by STR and STR Global, respectively the parent and sister companies of Hotel News Now, illustrate the global pipeline picture:

• U.S.: As of November, there was a 13.5% increase in the number of rooms in the total active pipeline year over year, and 35.8% growth in rooms under construction.
• Europe: Only the upscale segment reported a year-over-year increase in pipeline rooms, rising by 3.5% to 32,013 rooms.
• Asia/Pacific: In 2014, a total of 590 hotels representing 120,710 rooms are expected to open in the region.
• Central/South America: During 2014, 82 hotels and 13,210 rooms are projected to open, with most of the activity occurring in the upscale segment (3,838 rooms in 23 hotels).
• Middle East/Africa: The region counts 490 hotels and 118,820 rooms in the development pipeline, with most of the rooms under construction taking place in the United Arab Emirates (18,057 rooms).

While supply numbers have been edging upward and sources contacted for this report said they are hearing more talk of development projects, there was agreement that, over the near term at least, hotel operating performance will remain largely unaffected by supply.

“I think the people who are saying that supply ramping up is becoming an issue (for hoteliers) are being a little too paranoid,” said Jack Corgel, professor of real estate at the Cornell School of Hotel Administration..

Looking at the U.S. market, Corgel said if supply reaches the long-term run rate of between 1.5% to 2% growth, then hotel operators might begin to see some impact on their properties’ performance. Through November year to date, supply in the U.S. is up just 0.7%, according to STR. The rate of growth has been at or below 1% since November 2010.

Rob O’Neill, CEO of Vancouver-based American Hotel Income Properties REIT, which is focused on the U.S. market, said he is hearing more chatter about the development of economy and midscale hotels in the U.S. but is thus far not seeing much activity yet.

“I don’t know if they can get the money,” he said. AHIP has a total of 32 hotels in its portfolio, with four under construction.

Corgel said he does not expect supply to infringe on operating metrics until late 2016 or early 2017.

“2014 and 2015 will be pretty smooth as long as demand holds up,” he said. Year-to-date demand through November was up by 2.2% in the U.S., according to STR.

Other regions of the world are in the same boat as the U.S. In Europe, for example, supply remains limited on the continent as a whole, said Marc Socker, senior director of hotel fund management at Invesco Real Estate.

Data from STR Global indicates there was an increase of nearly 15% in the number of hotels under construction in Europe year over year. Still, year-over-year numbers are strong, with RevPAR up by 4.9% when measured in euros.

Demand is also showing strength, Socker said. “From an investor’s perspective, it’s very attractive, really.”

He said he expects the supply/demand relationship in Europe to remain positive “for quite some time.” He said he does not believe new supply will have a meaningful impact in Europe possibly until the end of the decade.

Also, Russell Kett, chairman at HVS London, said in an email that he expects demand to be largely unaffected by the new supply coming in.

“Happily, the demand picture is showing signs of improvement across many hotel markets throughout Europe, and the operational performance of hotels is unlikely to be too adversely affected except where an over-supply position is created,” he said. “In those cases, it often takes a number of years for the new supply to be absorbed.”

The region seeing the most development interest is the United Kingdom, followed by Russia, Turkey, Germany and France, Kett said. There are approximately 100 projects in the works in London, though most are only in the planning stages, he said.

In a perfect world, he said the new supply in Europe would replace outdated hotels that need to be removed from the system.

“Sadly, few planning authorities have the courage to permit this to happen, meaning that tired, worn-out hotels—many being operated by tired, worn-out hoteliers—continue to experience operating pressure from the ‘new kids on the block,’” he said.

Another variable influencing the larger supply picture is the availability of financing. Sources said that while the credit markets are continuing to heal, debt is still not as widely available as it had been in the past.

“It’s getting more relaxed,” Socker said, “but it’s still not that easy (to find capital).”

Kett said debt financing is becoming easier for acquisitions and refinancing where the borrower is already a known commodity to the bank, but new development loans are hard to come by.

At the end of the day, O’Neill said that while new development projects are coming up in conversation more frequently, he isn’t too worried about supply disrupting his company’s business.

“It’s not quite there yet,” he said, “which is good for me.”

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