Hotel owners and market analysts weigh in on how new supply could erode pricing power and make 2017 a tough year for the industry.
REPORT FROM THE U.S.—Hotel supply and its effect on performance has been this year’s hot topic in the industry.
Hoteliers are already seeing performance dip as supply meets and surpasses demand. In this roundtable, hotel executives and market analysts provide perspective on supply growth and how it will affect the hotel industry going forward.
SVP of lodging insights, STR
senior managing director, head of lodging research, CBRE Hotels
principal and industry leader, PwC
president and COO, Hersha Hospitality Trust
CFO, Pebblebrook Hospitality Trust
How do you believe the current supply and pipeline will affect performance in 2017?
Jan Freitag, SVP of lodging insights at STR: “New supply will negatively impact occupancies, now more than ever since demand growth will slow. It remains to be seen how hoteliers react to the new competition in their markets, but I would expect continued pressure on pricing and limited (average daily rate) increases going forward. In some markets (such as New York City and Miami), however, we are already observing pricing weakness and ADR declines.”
Mark Woodworth, senior managing director, head of lodging research at CBRE Hotels: “We expect net supply to increase 1.8% in 2017 (following a 1.6% increase in 2016). The volume of the existing pipeline, as reported by STR (Hotel News Now’s parent company), suggests that net supply change will be 2.1% in 2018, finally exceeding the long-run average change of approximately 2.0%. The last time supply growth was above 2% was in 2009 (at 2.8%, according to STR). This will be the longest period of below average supply growth since STR began collecting these data in 1987. The previous streak was six years from 2002 through 2007. This accelerated supply growth will definitely impair management’s ability to increase average daily rates in 2017, particularly in many of those markets with high levels of new construction (most notably Charlotte, New York, Houston, Miami and Cleveland).”
Scott Berman, principal and industry leader, PwC: “Supply growth is expected to accelerate in 2017. According to PwC Hospitality Directions, released in November, lodging supply growth is expected to accelerate to 1.9% in 2017, approaching the long-term average of 2.0%, for the first time since 2009 when supply increased at a faster pace than the long-term average. Acceleration of supply growth, paired with a continued deceleration in the rate of growth in demand, is expected to result in a decline in occupancy levels, for the first time in eight years.”
Neil Shah, president and COO of Hersha Hospitality Trust: “Supply has primarily been a major gateway market headwind across the last few years. But supply growth will spread across the country in the coming years and provide a significant challenge in suburban markets.”
Raymond Martz, CFO at Pebblebrook Hospitality Trust: “Business travel demand, both transient and group, continues to be weak. International inbound travel demand is also soft, and combined with the strengthening dollar following the recent election, this will be another headwind, especially in the gateway cities. With supply growth increasing in many of the major urban markets in 2017, the industry may experience one of the weakest years in terms of (revenue per available room) growth that we’ve seen in this cycle so far.”
Will supply growth slow? If so, when and why?
Freitag: “Yes, eventually the increase in new supply will slow. Keep in mind that for the percent increase to remain the same, the actual number of new rooms has to grow since the base (i.e., total U.S. rooms available) is higher every year. So, the math gets harder. At the same time, I have heard anecdotally that construction lending outside of the Top 25 markets is getting harder to obtain. And even in the large markets, it gets harder and harder to convince banks that a proposed hotel pencils out.”
Woodworth: “We expect supply growth to ‘level-off’ in the 2.1% to 2.2% range in 2018 through 2020. We will not likely see a spike in new construction (similar to previous cycles) because of a number of factors: Elevated developer cost of capital, primarily because of more expensive debt; and Airbnb and other participants in the sharing economy seem to be mitigating ADR growth. As such, development economics in many markets will not support new construction.”
Berman: “Lodging industry fundamentals are expected to remain positive, albeit decelerate. Supply cycle usually lags the RevPAR cycle as developer expectations adjust to evolving fundamentals. In addition to lodging industry fundamentals, slowdown in supply growth will be dependent on a number of factors, including the path of interest rates that drives capital market expectations and availability of capital.”
Shah: “Supply deliveries will accelerate in many markets in 2017 and 2018. But financing new projects today in major urban markets has become more challenging, and there will be a meaningful reduction in supply growth in future years.”
Martz: “Based on the current pipeline and construction starts, supply growth is not likely to slow until 2018 or perhaps 2019. Virtually all of the lenders that we work with have noted that they are pulling back from new construction lending. However, this is an encouraging sign that the lending community has identified the heightened risks associated with new development.”
What is currently driving RevPAR and why?
Freitag: “RevPAR has been and will be ADR driven. We project occupancy declines in 2017 and probably beyond. For RevPAR to be positive, that means that ADR growth has to make up for the occupancy decline. We expect that in 2017, and I would personally expect that also to be the case in 2018.”
Woodworth: "The volume of new supply will likely exceed demand growth from 2017 through 2019. As such, RevPAR will be driven entirely by increases in average daily rate. This more efficient revenue growth will help to offset increasing labor costs.”
Berman: “RevPAR currently and year-to-date through October has been largely driven by the group segment, more specifically their slightly accelerating room rates, which has outperformed transient room rate growth. As corporate profits begin to stabilize, this year has seen a meaningful deceleration in corporate transient demand.”
Shah: “Corporate profit growth should lead to some acceleration in RevPar growth in 2017. We will continue to feel the headwinds of a strong dollar and slower international demand growth but more certainty around the domestic political environment, and a more positive corporate growth outlook should drive positive growth for the sector.”
Martz: “Largely all of the major urban markets are operating at or above all-time peak occupancy levels. As more supply comes on line, room rates are likely to be negatively impacted. This is primarily because of the brands redemption programs, which encourage hotels to discount their near-term room rates in order to get to the high redemption rate thresholds. This is one of the structural problems that is negatively impacting the hotel industry, and it’s happening in most markets, not just New York.”