Study of CBD supply growth reveals troubling trends
Study of CBD supply growth reveals troubling trends
21 FEBRUARY 2017 8:57 AM

Supply growth, particularly in central business districts, has implications for how this cycle in the hotel industry will end. 

REPORT FROM THE U.S.—What a difference six months make.

At the NYU International Hospitality Industry Investment Conference in June, the consensus of hitting the cycle’s peak changed at this year’s Americas Lodging Investment Summit to views that were all over the place. The betting line amongst most is moderate growth through 2017 and 2018, followed by a mild recession in 2019—effectively pushing the “gloom” (but no “doom”) out a year, as compared to most prior forecasts.

We have also witnessed another camp that is riding the “sugar high” off of prognostications espousing that we bottomed out in July 2016, or that this cycle will simply skip a recession. While we find this thesis interesting, we are struggling to understand how all the systemic global macroeconomic issues we were facing in October have disappeared.

We don’t pretend to understand all the complexities involved in this transition, so we are taking a wait-and-see approach. However, in consultation with HNN and fellow colleagues, we decided it may be timely to relay the conclusions of a study we recently put together on lodging supply across 50 U.S. markets. Even though a drill down on market supply is at the top of any savvy investor’s list, we are not familiar with any comprehensive study detailing where we stand in this current cycle. As we point out in our study, this cycle is all about markets and, specifically, central business district (CBD) submarkets.

Our fall 2016 study examined STR data for 50 selected overall market and CBD submarkets. (STR is the parent company of Hotel News Now.)

For pipeline, we took “in construction” at 90% and “final planning” at 80% (likelihood of realization). Our select 50 markets kept to the mainland and ignored Las Vegas and Orlando, Florida. We decided to leave the pipeline data “pure” rather than make +/- arbitrary adjustments. We feel the study’s conclusions are still valid, as the pipeline today is really no different than it was a few months ago. If anything, it is more robust, as some projects in “planning” get pushed into “final planning” given this recent optimism.

One of the larger reasons for not presenting a clearer picture on supply is the way in which the data is typically presented. National supply statistics reveal a much smaller increase in supply during this cycle (decade) as compared to the prior two cycles as demonstrated below:

We certainly understand why the national picture is relevant to anyone with a widely diversified geographical portfolio. The statistics in the above table also reveal why some have concluded supply is not a concern in this cycle.

Another error analysts make when examining lodging supply data is they tend to layer in market supply growth on top of total market supply. So the 4,000 new rooms in Chicago are viewed as 4% growth on the total market supply of approximately 100,000 rooms. The problem arises when one realizes that 98% of the 4,000 new rooms are inside the CBD. The math changes significantly when those 4,000 rooms are examined against the approximately 40,000 CBD submarket supply.

The point is confirmed when looking at the difference between overall market and CBD supply growth by recent cycle. Whereas the 1990s can generally be defined by developers building Hilton Garden Inns adjacent to Courtyards, this current cycle again is all about CBD supply growth:

As the above table illustrates, overall market supply growth far outstripped CBDs in the ’90s. They were roughly equal in the prior cycle, as continued suburban sprawl was matched by CBD booms in markets like Houston, Baltimore and St. Louis. In this cycle, the CBD exceeds the overall market, especially when the pipeline is added.

Finally, any study examining lodging supply would be remiss without attempting to quantify the impact of Airbnb. Utilizing data provided by Airdna, we analyzed Airbnb listings in all select 50 markets to generate an approximate “apples to apples” comparison to lodging supply. Analysts, once again, tend to look at impact on the overall market and typically conclude 1% to 2% lodging impact. Our conclusions, as per CBD lodging supply growth, indicate an average 7% Airbnb CBD impact across our select 50 markets.

The CBD supply wave is real: 17.4% growth (construction only) is a significant statistic; 30.6% (total pipeline & Airbnb) is a concerning statistic. Even the bottom 25 supply CBD submarkets are projected to have 14.2% supply growth in this cycle. Our projected cycle (only through 2018) CBD supply growth of 30.6% compares quite impressively against the 14.7% average of the last two cycles.

If you are listening to someone telling you to not worry about supply, you need a new advisor.

In the next part of this series, we will go into more detail on supply by market. In the third and final piece of the series, we will layer in some RevPAR trends, point out markets of real concern and make some conclusions about what we think this all means.

Fingerprint Hospitality LLC is a lodging advisory firm focused on full service assets in urban and resort markets. Led by Principal David Snell, Fingerprint brings over $8 billion of hospitality acquisition and development experience across major U.S. and European markets. The essence of Fingerprint is a belief that every hotel has its own sense of place and relationship with its community. Fingerprint believes in maximizing those intrinsic values in both branded and independent hotels.

The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.

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