Supply issues at tipping point in many US markets
Supply issues at tipping point in many US markets
28 AUGUST 2019 8:30 AM

Experts from STR dove into the winners and losers in terms of performance among the top 25 U.S. markets and explored hotel development opportunities in markets outside the top 25.

NASHVILLE, Tennessee—Supply growth has taken a toll on some top 25 markets, while factors in some markets beyond the top 25 make them good locations for hotel development.

In two sessions at the Hotel Data Conference, data experts from STR, HNN’s parent company, offered some perspective on the performance and potential in the top 25 markets and beyond.

During the “Top 25 markets: Best performances in a leading role” presentation, Brad Garner, SVP of client services and relationships at STR, said performance for top 25 markets is at a tipping point, with a lot of uncertainty around international inbound travel arrivals, the strength of the U.S. dollar, inflation, the political climate and trade wars, and calendar event comparability.

On a 12-month moving average, supply growth for these markets has sat at 2.6% since August 2018, while demand hit a high point of 3.8% in the same month before dropping to 1.3%, he said.

“Make no mistake about it; (demand growth) is declining and is right above that 1.3% right now,” Garner added.

Somewhat skewing those demand numbers are one-time events in certain markets, such as an early government shutdown in Washington, D.C., and a royal visit by Britain’s Prince Harry to New York City in the summer of 2018, he said.

2019/2020 forecast
STR forecasts RevPAR growth among the top 25 markets by placing cities into three categories: Negative, flat to CPI and growth, according to Kwabena (Kobe) Akuffo Owoo, operations analyst at STR.

Here’s where some markets in the top 25 stand in terms of RevPAR growth for 2019 and 2020.

Miami is hosting the Super Bowl in 2020, which should lead hoteliers to raise rates around the event, Owoo said. As a result, STR anticipates RevPAR growth of around 6% in the market for 2020.

Atlanta, which hosted the Super Bowl in 2019, “saw a lot of demand come into the market, and (hoteliers) were able to raise rates significantly,” he said.

Atlanta is “actually the highest forecasted market for 2019 at 5.8% (RevPAR growth),” he said.

Flat to CPI
Denver has seen a lot of supply move in, but there’s also been a lot of demand growth in the market, Owoo said, adding that STR placed the market in the flat to CPI category for 2019 and 2020.
Denver, which has added approximately 100,000 hotel rooms every year since hosting the Democratic National Convention in 2008, “is the beneficiary of a lot of influx of people for both group and transient activities,” he said.

Phoenix is another market expected to be in the flat to CPI group for 2020, with demand growth that is on par with Denver, Owoo said, “but not a lot of rate growth.” Rate growth is projected at 1.2% to 2.5% next year.

Kwabena (Kobe) Akuffo Owoo, operations analyst at STR, speaks during the “Top 25: Best performances in a leading role” session at the Hotel Data Conference. (Photo: Danielle Hess)

Supply growth continues in New York, recently dominated by lower-tier hotels, which has resulted in a lower price point and puts the market in the negative category for RevPAR in 2020, according to STR.

“With that, we’ve seen a lot of (average daily rate) decline in New York, and with the supply coming in, we’ve seen a lot of occupancy decline as well,” Owoo said.

Houston, another market with supply issues, is also expected to see negative RevPAR change year-over-year.

“Although oil has recovered in pricing and is bringing a bit of demand in that market, because of the occupancy declining, it is also making rates decline,” Owoo said.

Developing outside the top 25 markets
Hotel developers aren’t just building in the biggest cities in the U.S. In a presentation titled “Beyond the Top 25,” STR Director of Custom Forecasts Blake Reiter and Winston Hotels EVP of Development Mathew Jalazo shared the quantitative and qualitative factors that make markets outside the top 25 attractive for potential hotel development.

Increasing roomnight demand and consistent growth in average daily rate and revenue per available room are positive signs of a healthy market, Jalazo said.

Winston Hotels EVP of Development Mathew Jalazo speaks during the “Beyond the Top 25” data dive at the 2019 Hotel Data Conference. (Photo: Event Coverage Nashville)

He cited the New Mexico South market—which covers much of the southern half of the state, minus Alamogordo and Las Cruces—and its 15,900 rooms as an example. From October 2017 to December 2018, the market had 15 consecutive months of double-digit ADR growth and demand has consistently outpaced supply.

“That’s a story we like to see where there’s potential for a new hotel,” Jalazo said.

Knoxville, Tennessee, and Tucson, Arizona, have seen similar performance consistency. Knoxville’s RevPAR growth eclipsed total U.S. RevPAR five years running from 2014 to 2018, while Tucson increased RevPAR at a 9.25% compound annual growth rate during the same period.

Other markets to watch outside of the top 25 include Daytona Beach, Florida, Jalazo said.

The market historically hasn’t had the same “pricing premium” as Miami, West Palm Beach, Del Rey or Fort Lauderdale. But significant investment projects including the One Daytona Entertainment Complex mixed-use development at Daytona International Speedway and redevelopment of Daytona Beach’s downtown could set the market up for hotel performance growth.

“That’s caused a ripple effect: Now you start seeing applications pouring in for other mixed-use developments that are around downtown as well as the beach, and you’re starting to see that momentum build in Daytona to really change the entire dynamic in that market,” Jalazo said.

Reiter added that investment is more noticeable in smaller markets than it is in the top 25.

“If you overlay these (projects) and say these were happening in New York or Nashville, you’d say, ‘So what, what’s next?’” Reiter said. “The key for this is identifying places where there’s a lot of investment in infrastructure from public and private but in markets where previously it was kind of stagnant or not necessarily growing, and it’s identifying those smaller markets where something like this was not necessarily the norm.”

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