5 supply and pipeline trends to consider
5 supply and pipeline trends to consider
21 APRIL 2017 7:33 AM

Speakers on a recent panel shared reminders why not all supply growth is negative, and what trends to watch for as pipeline numbers grow.  

SAN ANTONIO—Hotel pipeline and supply changes are high on the radar of most U.S. hoteliers, particularly those looking to buy, sell or build hotels.

Speakers on a panel titled “What’s in the pipeline?” at the recent Asian American Hotel Owners Association national conference talked about supply and pipeline trends that hoteliers should consider.

1. Current supply growth is 'average'
Both CBRE Hotels and STR forecast U.S. supply change at 2.0% for 2017—a rate Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research, called “average behavior from a supply change perspective.” (STR is the parent company of Hotel News Now.)

According to STR, the U.S. pipeline includes 191,000 rooms in construction as of March, representing 24% year-over-year growth.

Other speakers on the panel agreed that current levels of supply and pipeline growth have reached a new normal overall, and are very much market-dependent on a micro level.

“For the next couple years, in the economy segment our estimate is that annual supply change will be 0.9%,” Woodworth said. “If you’re in upscale, over the next few years it’ll be north of 13%. It depends on who you are, what you are, where you are. You could be seeing lots of stuff happening, or not much at all.”

2. Stability is a good thing
Speakers reminded audience members that the current economic and hotel cycle recovery, which has been a prolonged one, might represent the “new normal.”

“We’ve forgotten what ‘normal’ is because we went from such a depressed point at the end of 2008 and 2009 to now,” said Peter Nichols, VP and national director of Marcus & Millichap’s national hospitality group. “For the last eight years, we’ve seen huge growth and improvement, and now things have started to stabilize and settle down. You can’t see 8% to 12% growth every year and we need to be aware of that.”

Russ Rivard, managing director and senior partner with HVS Dallas, said there are plenty of reasons to be calm about the current supply situation.

“When you see the labor costs associated with new construction, you realize a lot of that will slow down any construction hysteria,” he said. “That cost of new construction and the tightening of lending means that 2% growth makes a lot of sense. It’s normal.”

Again, speakers pointed out that different segments and markets behave differently. Kim Bardoul, partner with The Highland Group Hotel Investment Advisors, said extended-stay room construction is at an “all-time high, at 40,000 at the end of 2016,” and that boutique rooms under construction also are gaining traction, but in general are able to be absorbed.

3. Consider supply trends when buying and selling
Rivard and Nichols reminded audience members to consider supply and pipeline data when thinking about selling or buying a hotel in a particular market. But, they said, growing supply doesn’t always have to be a bad thing when it comes to property value.

“Yes, it’s critical to consider new supply when you’re valuing a hotel, but it depends on what the new supply is, where it is in the market and whether it affects the subject property or not,” Rivard said. “New supply can be a bad thing if it’s not in check, but it may create new demand. A lot of times, new supply helps a market overall, with latent demand, if the market isn’t already oversupplied.”

Nichols agreed and advised hoteliers to do their homework and pay attention to indicators when they’re considering building in a market that has new supply coming in.

“If it’s going to cost you 20% more to build than to acquire, then from a valuation and rate standpoint it’s not necessarily a bad thing, because that new hotel will have to have a higher rate to support itself financially, and that’s going to help you as the existing hotel in that market,” he said. “You want the rising tide to raise both hotels, not be a drag on the market.”

He also stressed the importance of knowing your individual market’s demand drivers inside and out.

4. Know that some markets can handle the supply, while others can’t
The speakers cautioned against broadly labeling markets “hot” or “cold,” since knowing demand drivers and supply absorption potential is so important.

Rivard cited high-growth cities like Seattle; Austin, Texas; Nashville, Tennessee; and Chicago, but he said it always comes down to demand generators.

“It’s a concern that there’s a lot of supply, but I’m not really worried that it’s oversupply—that’s the difference,” he said.

Nichols pointed to Nashville and New York City as “head-scratcher” markets because there’s so much new supply, but it keeps getting absorbed, and in general, hoteliers are able to maintain high occupancies and rates.

Bardoul got more specific, pointing out trouble spots for extended-stay hotel supply growth.

“There’s a lot of under construction extended-stay supply coming to about eight markets—half of which are already declining in occupancy because of energy industries—like Tulsa, Oklahoma City and Pittsburgh,” she said. “I’m not sure that can be supported.”

Bardoul also said that while Nashville overall seems to be absorbing new supply well, the picture is trickier when you focus on boutique hotels specifically.

“There are 1,300 hotel rooms in seven boutique hotels coming to Nashville, and there’s demand to absorb those rooms if they’re close to the convention center,” she said. “But the further you get, unless they’re serving a very underserved niche, I worry they won’t do as well.”

5. Consider history and forward-looking trends
Woodworth said it’s important to let history and statistics guide some decisions when it comes to supply.

He cited Austin, Texas, which he said is CBRE’s No. 1 market in terms of highest average annual supply growth forecast for the next five years.

“Over the last five years, Austin grew at 5%. Over the next (five years), it will grow 4.3%,” he said. “Compare that to Nashville … Over the last five years, we’ve only seen an average of 2% supply growth in Nashville, but we’re forecasting 4.6% annual change going forward.”

Woodworth also suggested hoteliers look at data surrounding employment and migration trends.

“Some markets are losing people, and other markets are picking them up,” he said. “The ones where population is growing are growing because that’s where the jobs are, and jobs create demand for hotels.”

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