Taking a realistic look at supply growth can help hoteliers turn today’s catastrophe into tomorrow’s home run.
REPORT FROM THE U.S.—A recent article claimed New York City’s hotels will rebound in 2017. Sources tell me the exact opposite.
For some context, consider a high-profile transaction last year in Austin, Texas: In the wake of the 1,012-room JW Marriott opening, a revenue manager friend at a major downtown asset said compression had been sucked out of the market as if a balloon had popped. And the 1,048-room Austin Fairmont hasn’t even opened yet.
- This is the last of a three-part series this week looking at CBD supply growth. Read part one here and part two here.
The point is that demand and supply are forever intertwined—you cannot isolate one or the other. The claim that all cyclical iterations are caused by demand adjustments is naïve. The Manhattan lodging market will be permanently changed because a huge segment that didn’t exist previously—select-service hotels—became the highest and best use for small midblock sites in Midtown South. There were around 65,000 rooms when we started buying in 2004-05. Our Manhattan forecast, which is inclusive of our Airbnb impact, 10-plus years later is almost 125,000 rooms. Try telling those NYC revenue managers supply doesn’t matter!
New York City is also a good example on the sharing economy: While local legislation has been aggressive there, it also accentuates the problem of enforcement. The broader and more important point, however, is that the sharing economy is here to stay. New companies will continue to emerge while existing groups fight for share. True consumer demand will find ways around government legislation. After Uber and Lyft were outlawed in Austin, a dozen startups broke out to fill the void.
With the intent of layering demand data into the analysis, we examined recent compound annual growth rates for both revenue per available room and supply. The following table presents the top 10 central business district submarkets with the greatest negative variance between RevPAR and supply growth CAGRs:
Hello, Oklahoma City! Our guess is that a couple of the markets listed above are not on many market watch lists.
At the end of our data dive, we tried to take a step back and gauge the relative health of the markets we spent our time analyzing. We believe the conclusions reached are much more relevant to identifying cautionary markets than to indicating the next place to build a Curio. This is because a high market ranking resulting from a lack of supply does not necessarily correlate to that market’s “health.” In other words, there is a reason there isn’t any supply occurring—typically, low rates.
Curiously, the bottom three are all influenced by the oil boom and bust. We continue to be bearish on those markets, as oil doesn’t seem poised to start pushing north of $60 any time soon.
Our conclusions about markets are simply directional. We would be particularly cautious when considering lodging investment in any of the bottom 10 markets listed above. We also acknowledge it is a no-brainer to point out San Francisco is a healthy market. We did like seeing Detroit in the Top 10 list, but Jacksonville or Cleveland, maybe not so much.
Fingerprint has a long track record of conservatively viewing hotel real estate investments—we believe that the approach we took in our study, “The CBD Cycle,” is consistent with that approach. All of the analytics and derived conclusions are effective as of October 2016, so there isn’t any post-election noise. While we understand future supply constraints due to the spike in construction costs and increasing supply concerns amongst lenders (big surprise!), we also think if the shackles are taken off regional banks or financing regulations are loosened in general, then all bets are off.
We also stress that commentary concerning current market performance is during a period in which the overall macroeconomic picture is solid with consumer sentiment following along. Despite retreating growth rates, most of our top 50 markets remain in positive RevPAR territory. At the same time, however, it is important to acknowledge the lines of national RevPAR and supply growth have intersected.
At the end of the day, we are believers in history and cycles. As stated in the first part of this series, we do not pretend to handicap where the global macro is headed over the next few years. We do know, however, that whether it is after year eight, nine, 10 or whenever, there will be a reset to year zero. We agree with the idea that this is simply a reacceleration of the cycle that has pushed us from last June’s peak into extra innings. It is interesting to note that when reacceleration occurred in prior cycles, RevPAR growth underperformed GDP growth. Supply is always a late-cycle issue.
Given our industry’s history of overbuilding, and the expectation that at some point in the future there will be a shock to demand via economic disruption, we think the combination could make for some pretty interesting times ahead. While we firmly believe in finding opportunity at every point in the cycle, our recommendation for those investing in hotels today is to make sure you are meticulously assessing your risk profiles.
Some final observations and takeaways:
- Monitor the good with the bad—today’s catastrophe could be tomorrow’s home run.
- Don’t forget that replacement cost—while obvious—is a valid metric.
- Successful hotels in a choppy environment will possess tangible competitive advantages—whether location, unique physical attributes or niche positioning.
- Heightened concerns surround the three “problem” markets due to excessive continued supply growth—in particular, we believe Miami could become a real bloodbath given Airbnb and CBD growth on top of recent Miami Beach supply additions.
- Secondary and tertiary markets are quickly becoming less attractive due to supply concerns.
- “Contrarian” strategies around targeting airport or suburban submarkets don’t necessarily make sense, as CBD pain will undoubtedly spread.
We don’t know how this cycle will shake out. We simply hope our study encourages a more realistic way to look at lodging supply growth. The reader can draw their own conclusions about the data—for us, it reinforces the need to dig deep into market fundamentals and run shock scenarios through the pro forma.
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.
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.