Downtown hotel supply resurgence reveals segment shift
Downtown hotel supply resurgence reveals segment shift
12 JULY 2019 8:10 AM

As hotel supply growth rates in central business districts boom, these areas are attracting a very different traveler than they were 20 to 30 years ago.

HENDERSONVILLE, Tennessee—Across the United States, downtowns are making a comeback.

In the past decade, increasing numbers of people are choosing them to live in, work in and visit downtown. As many central business districts (CBDs) have strong population growth, a burgeoning business presence and thriving tourist industry, hotel supply is also booming.

Historically, the CBD—or the main business and commercial area of a city—has played a key role in the social and economic well-being of the city. However, as growth moved away from the city toward suburban areas in the 20th century, many downtowns fell out of favor.

A recent STR survey of these trends in CBD submarkets (53 total) shows that hotel supply growth rates in CBDs are surging ahead of non-CBD rates (Chart 1). This growth highlights an important shift in the hotel landscape as CBDs are attracting a very different traveler than they were 20 to 30 years ago. (STR is the parent company of Hotel News Now.)

Higher-class hotels driving CBD supply growth
One characteristic of this growth is that travelers are seeking a higher class of hotel. As a result, economy hotels are playing a much smaller role in CBD submarkets. In the 1990s, these CBD submarkets were marked by economy and midscale hotels, which comprised nearly 30% of hotel supply. By 2018, economy and midscale hotels accounted for less than 15% of hotel supply. From 2010 to 2018, economy class and midscale hotel supply has decreased by 9.4% and 7.7%, respectively.

As downtowns revitalize, CBD travelers are expecting a higher class of hotel. The growth that is occurring in these submarkets is coming from upper-midscale hotels and above (Chart 2). Luxury hotel supply is growing at the most disproportional rate, with a growth nearly three times greater in CBD submarkets (CBD: +23%; non-CBD: +8.4%). Nationally, as the landscape of hotels is shifting toward hotels in higher segments, are we seeing signs of softening performance?

CBD submarket performance strong, but trending below non-CBD submarkets
In terms of performance, CBD submarkets have both higher average daily rates and occupancy compared to other non-CBD submarkets. For CBDs, ADR in 2018 was $189, with an occupancy rate of 75.6%. Comparatively, the ADR for non-CBDs was $118 with an occupancy rate of 65.1%. From 2014 to 2018, CBD ADR has grown at a much slower rate than non-CBD submarkets, while CBD occupancy rates also have not increased as much as their non-CBD counterparts.

Most high-growth markets driven by CBD growth, with a few exceptions
Supply growth is strong in many markets nationwide, with CBD submarkets leading the way in many cases. For example, Austin, Texas; Kansas City, Missouri; Lexington, Kentucky; and Nashville, Tennessee, all have high rates of construction as a percentage of current supply in the CBD submarkets, while the non-CBD submarkets are not experiencing the same spike in hotel supply growth. The table below shows the Top 25 markets where CBD supply growth is highest.

As downtown submarkets continue to show strong signs of economic growth, it is no surprise that we are seeing hotel supply surging in these submarkets. As performance in these submarkets continues to be more favorable than for hotels outside of the urban core, especially with downtown hotels commanding higher rates, we will likely see more growth in upper-midscale and above hotel supply as economy and midscale supply continues to shrink.

Will Sanford is a Research Analyst at STR.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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