New supply will continue to headline 2016
28 DECEMBER 2015 12:35 PM
A virtual panel of hotel owners and market analysts weighed the pros and cons new supply had on the U.S. hotel market in 2015 and what it means for local business next year.
REPORT FROM THE U.S.—U.S. hotel supply was a hot-button issue in 2015, as the gap between supply and demand values regulated to an extent, and some markets saw faster-paced supply influxes.
In a virtual roundtable, hoteliers and market analysts weighed the impact supply growth had on their companies and the industry overall this year, taking into account new players on the scene. Overall, roundtable participants agreed that 2016 will be a year of more change on the supply front, in top markets and also in areas with more diverse demand drivers.
President and CEO of Vesta Hospitality
Principal and industry leader of the Hospitality & Leisure Group at PwC
SVP of lodging insights for STR
Aik Hong Tan
Principal of Greenwood Hospitality
President of PKF Hospitality Research
1. How did supply changes in 2015 have an impact on your business?
Vesta Hospitality’s Takach: “New supply is a constant issue for our business. In terms of development it forces us to look at underlying demand, barriers to entry and infill locations to ensure that we are somewhat safeguarded. In terms of operations, it is important to keep the hotels fresh and the service levels up to compete well with any new competition.”
PwC’s Berman: “Overall, 2015 supply growth accelerated significantly from 2014, crossing the 1% mark for the first time since 2010 and moving closer to the long-term average of 1.9%. In 2015, supply growth was the strongest in the upscale chain-scale segment, followed by the upper-midscale segment, both of which continue to have the largest pipeline of hotels under construction. The strong supply growth in these segments has affected pricing power in certain markets, including New York City, which is only one of two major U.S. markets experiencing a (revenue-per-available-room) decline so far in 2015.”
Greenwood’s Tan: “Overall, supply growth has not been a problem in markets where our hotels are located. One exception is Charlottesville, Virginia, where we operate a DoubleTree hotel. Several new select-service hotels have recently opened there and that has affected the occupancy rates of our hotel as well as the overall market because new supply growth outstripped demand growth.
“The formula for success there and across our portfolio remains the same. We have to stay vigilant, ensuring that our guest service remains exceptional and our hotel continues to provide excellent value to our guests.”
STR’s Freitag: “Supply changes in 2015 were still pretty muted and only a few markets recorded an uptick in supply over 2% (Houston; Nashville, Tennessee; Seattle; New York City; and Miami/Hialeah, Florida). In those markets, occupancy will likely be affected going forward, although it is worth repeating that the supply growth is often a function of developers taking advantage of very healthy demand increases—such as in Miami and Nashville. Overall the 2015 supply increase is a ‘preview of coming attractions,’ and we expect supply growth to accelerate through 2016.”
PKF’s Woodworth: “At the macro level, U.S. lodging supply will increase by an estimated 1.1% in 2015, well below the long-run average of 1.9% (per STR and the increase in demand for the year of 3%). At the local level, certain markets were negatively impacted by the magnitude of new hotel openings that have occurred in 2015.
“Supply development trends coming out of the 2008/2009 industry recession have differed from historical precedence. This time around, the greatest construction activity has occurred in the major markets; this is because the demand growth realized over the past five years has disproportionately happened in the bigger cities.”
2. What effect does the supply of alternative accommodations (such as Airbnb, HomeAway, Onefinestay) have on hotel supply now and moving forward?
Takach: “In terms of non-hotel competition, I am not sure that it is a major factor except in the top 15 markets where Vesta does not have a large presence. There seems to be more of an impact on extended stay than transient roomnights. From what I understand, when the numbers from Airbnb get analyzed, the roomnights are usually for a longer stay and represent people who would otherwise stay with friends or family or an extended-stay hotel or apartments.”
Berman: “Alternative accommodations have carved a niche for themselves, especially in certain gateway and resort markets. These accommodations serve a specific demographic, especially for leisure travel, and continue to keep pressure on the traditional lodging supply. While the impact of these alternative accommodations has to be calculated on a market-by-market basis, the pipeline for hotel construction starts is strong with more than 140,000 rooms ready to enter the U.S. market. This is indicative of a confident developer community who believes traditional lodging, on an even playing field, remains an economically sustainable asset class.”
Tan: “These alternative accommodations will erode pricing power of hotels especially during peak demand days. This will have an impact on the overall (average daily rate) of hotels in markets where such alternative accommodations are prevalent. The trend of these alternative-accommodation options is still fairly new and there is not sufficient data to quantify their direct impact. As more data becomes available, the potential impact of this form of accommodation in specific markets will need to be factored in to any decisions made regarding potential new developments.”
Freitag: “The new supply will likely attract some leisure demand and siphon off some extended-stay travelers who would have chosen a hotel otherwise. The verdict on the business travel impact is still out, partially because some companies do not allow travelers to stay in alternative accommodations, partially because some travelers will always prefer to collect points through a loyalty program. Current thinking is that the millennial traveler is the prime target for using alternative accommodations, but it will be worth watching if that traveler pattern remains as that age group matures. It is clear, though, that the new hotel room supply is now no longer the only supply figure that developers need to pay attention to when they plan a new property.”
Woodworth: “I am tempted to respond with a short answer: It is too early to tell. With traditional hotels operating at record occupancy levels, the tempting answer is to say that there has been no impact thus far. The fact that Airbnb supply, which continues to grow at a rapid rate, already exceeds 5% of the traditional hotel stock in approximately 20 of the larger U.S. markets suggests that this phenomenon should be monitored closely, and we are.
“Moving forward, we are likely to see fewer hotels developed in certain locations than what would have been the case had the Internet not spawned the sharing economy. This will be noticeable in resort locations as well as in select urban and in-town markets. From an economic impact perspective, these potential negatives will be more than offset by incremental levels of visitation made possible through the flexible sharing-economy inventory.”
3. What markets do you like as potential places to expand and why?
Takach: “In terms of markets where we are looking to expand, Vesta focuses on the Northwest United States because it is our home and is attractive to most of our equity partners. However, we are definitely opportunity-focused and will consider any market or location that we feel is viable. Specifically, we look for value-add acquisitions in markets that have stable demand from a variety of sources and infill locations with significant barriers to entry.”
Berman: “With the ongoing introduction of new, and the transformation of several existing lodging brands, including soft brands, there will be a surge of inventory shifts in virtually every major U.S. market, reflecting customer expectations for efficiently designed, wired hotels filled with today’s creature comforts. This includes virtually every chain scale and product type, including resorts. We believe those hotels that are physically obsolete and categorized as traditional ‘boxes’ may feel competitive pressure, if they have not already, from the next generation of inventory.”
Tan: “We continue to like secondary markets with stable demand generators such as colleges or diverse corporate demand instead of being dependent solely on a single large company. These markets can weather a downturn better and are less volatile. They are also more suitable for our investors who look for steady cash flow rather than significant capital gain upon sale.”
Freitag: “At STR we do not bet on particular markets; rather, we are agnostic and show industry participants where development happened after the fact. That said, it is hard to bet against the coastal markets or against markets that have one or multiple very strong demand generators (such as Nashville). I have said elsewhere that upper-upscale, full-service hotels are going through a development drought and some smart investors are setting themselves up for success by providing ballrooms and meeting space to markets where the majority of new supply will be limited service.”
Woodworth: “We prepared an analysis for Jim Burba for ALIS 2016 of markets that will likely be ‘under supplied’ in 2017. As such, I cannot release the full list now, but representative cities include Hartford (Connecticut), Fort Lauderdale (Florida), Columbus, Ohio and Fort Worth (Texas) (a total of 12 markets will be covered at ALIS). These markets will be ripe for expansion because of the underlying strength of the fundamentals and the prospects for mid-to-long term economic growth in that community. There are a few major markets on the list, but most of the opportunity … will be in the secondary and tertiary locations.”