Total pipeline supply growth will reach an average of more than 30% across 50 selected central business districts in the current cycle, according to a study.
REPORT FROM THE U.S.—The re-urbanization of America is well underway.
From millennials retreating out of Silicon Valley to the explosion of downtowns in Austin, Texas, and Chattanooga, Tennessee, a significant socioeconomic shift is reshaping the American landscape. Suburban sprawl is being replaced by urban density.
Corporate America is following suit—construction machinery company Caterpillar, for example, just announced it is relocating its headquarters to downtown Chicago.
These trends warrant new hotel supply to keep up with new demand and, in many markets, allow unaccommodated demand back into the market. Our concern is the estimated 30.6% supply growth across our select 50 central business district (CBD) submarkets through 2018.
We believe the industry crossed a valuation threshold somewhere in late 2012 or early 2013 when development became feasible again. Historically low cap rates—due to the imposed interest rate environment—along with the dramatic influx of cross border capital pushed pricing to record-setting levels across many cities over the past four years.
The values in the following table exceed full-service—and select-service—development costs:
The evolution of select-service hotels in urban markets, the origination of new lifestyle and boutique hotels and the proliferation of new brands all facilitated this CBD development boom. Historically low-cost debt for these projects didn’t hurt. The fact that these were more complicated and often adaptive-reuse urban projects partially explains why there is a late supply surge in this cycle.
The first point to make about CBD hotel supply is that there are a number of markets with large amounts of supply already realized. Our research discovered 15 markets with supply growth greater than 10% during the period of 2010 through August 2016 TTM (trailing twelve months). The top 10 are shown in the table below:
As stated in the first part of this series, one needs to examine CBD supply growth on existing CBD supply. The above table indicates that, for a number of markets, supply is already an issue; in many markets, recent performance is reflective of these looming supply issues. The above table also reveals how the bottom 25 markets are late to this party with only 1.3% growth.
In addition to the less than 10% CBD supply growth realized to date in this cycle, there is another 7.4% increase expected over the next two years.
- Unfortunately, problem markets like Houston, New York City and Miami (14th) all have significant supply still coming; it is also worth noting that Austin and Nashville, Tennessee, are at the top of Tables 2 and 3.
- Millennial favorites like Seattle; Portland, Oregon; and Denver all have big supply increases coming on top of what has been realized to date (Denver in Tables 2 and 3).
- Large supply increases in the historic districts of Savannah, Georgia, and Charleston, South Carolina, lend support to the idea that market forces are the only true barrier to entry for hotels.
Finally, we looked at our select 50 when layering in all of in construction, final planning and Airbnb. The results indicate that supply is a real issue across a multitude of top U.S. CBD submarkets.
The following table presents the top 10 markets with regard to overall supply growth in this current cycle:
While many of these markets are not particularly surprising, we think the significant percentages across the board is very relevant. CBD supply growth of 17.4% “In Construction” and 30.6% total pipeline growth are significant statistics. We also cannot recall seeing data presented in a similar manner. On Miami, it is important to note that these increases are for the CBD while the prior Miami supply increases were in the Beach.
The CBD cycle is a real phenomenon. We do not get to below 20% total supply growth until the 28th market on our list and not to below 10% until the 45th market. While most who read this study are already well aware of this, it’s the magnitude that is surprising.
It is clear that underlying fundamentals warrant supply increases in many of these markets. Then again, we are an industry that needed an outsider to figure out the bed is important. In that spirit, we as an industry certainly have a well-established track record of overbuilding. We believe that is occurring today across a number of CBD submarkets.
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 US 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.
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