Yesterday a concerned investor sent me an article with the following headline: “Hotel Overbuilding Softens New York, Hurts Austin, Crushes Oklahoma.” Sounds ominous. The tag line went on to say, “New construction is hurting the hotel business in markets across the country.”
The article quoted industry expert Jan Freitag, senior vice president for STR Global: “There are a ton of markets where occupancy rates have already declined.” Let’s break it down. For hotels, the supply/demand equation is always local. Freitag could have said, “There are a ton of markets where occupancy rates are reaching new record highs in 2017,” but that’s not as interesting.
What’s lost in the spin is Freitag’s assertion of “Record-breaking occupancy rates from last year (2016),” in the same article. Freitag described 2016 U.S. hotel occupancy this way in another recent article posted HERE: “It’s the highest occupancy rate ever recorded for a year.” Wow, that’s really good! Why is this great news lost?
That sentence in the scary article finishes with, “will slightly decline in 2017 and 2018.” The story becomes the projected decline instead of the record performance. The second article provided more detail, with Freitag saying that “occupancy rates are expected to dip slightly in 2017 and 2018, while demand will help keep room rates rising at a healthy rate.” Yes, friends, hotel demand is measured by RevPAR (revenue per available room), a measurement that accounts for both occupancy and ADR (average daily rate).
We find the whole story in the article I posted HERE: “Revenue per available room is expected to rise 2.3 percent in 2017, according to STR. Room rates should also rise 2.8 percent on average.” STR has also forecast rising RevPAR in 2018, as a matter of fact.
The Rest of the Story…
Hotel supply/demand is a localized phenomenon. Be wary of hand-picked local scenarios. Some local markets will enjoy healthy economies yet have only modest growth in room supply, while others will endure a poor local economy coupled with aggressive room supply growth. Words like “hurts” and “crushes” only apply (as far as I’ve read and heard) to oil/fracking markets, which Springwood has carefully avoided. I chased sites in Pittsburgh a couple years ago until I realized that their newfound growth was fracking-driven. Then I ran away. That growth evaporated after several new hotels were built.
York and Lancaster, PA are seeing a little occupancy erosion – some of it from our own new products – but both markets opened two hotels last year and two more are opening this year (including our TRU by Hilton). Occupancy has softened but the new rooms are being absorbed at about the rate that our market studies had forecast. That’s the key.
We’re setting record revenues right now in Hershey, PA and Frederick, MD. One new hotel is on the way in each of those markets, so the gains will moderate, but it’s still record revenue. I could write an article about those two markets headlined, “New Hotel Construction Crushes Growth Rate of Record-Setting Revenues,” but who would read it?