Hotel Occupancies Hold Up In Spite of New Construction

Hotel Occupancies Hold Up In Spite of New Construction

Hotels had another great year in 2016, even though developers keep on opening new properties. For the whole year of 2016, the occupancy rate for hotels averaged 65.5 percent in the U.S., according to hotel data firm STR.

“It’s the highest occupancy rate ever recorded for a year,” says Jan Freitag, senior vice president of lodging insights for STR.

Occupancy rates have kept rising even though hotels face competition both from home-sharing websites like Airbnb and from hotel construction. However, occupancy rates are expected to dip slightly in 2017 and 2018, while demand will help keep room rates rising at a healthy rate.

There are now 183,000 hotel rooms under construction in the U.S., according to STR. That’s up 30 percent from 2015. This year, the inventory of hotel rooms is expected to grow by 2.0 percent. Demand for those hotel rose is expected to be high, but not high enough to keep the occupancy rate from falling on average by 0.5 percent in 2017.

Nevertheless, 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.

The danger of overbuilding would be higher if banks were more willing to make construction loans. Some large hotel projects in downtown areas have been delayed because banks are not willing to lend as much.

“The level of new construction is not as high as it would normally be given the occupancy numbers,” says Jeff Myers, managing consultant for CoStar Portfolio Strategy. “The financing is not there.”

Overbuilding threatens downtowns

“There has truly been a shift in new construction—in what is being built and where it is being built,” says Myers. More than a third of all the new hotel rooms that have opened since the recovery began in 2010 have opened in central business districts (CBDs). Before 2010, the share of all new hotels that opened in downtown areas was closer to one in six, according to CoStar.

“If there is a supply risk, the risk is going to be most pronounced downtown or in downtown submarkets,” says Myers.

Also, a few major hotels markets have seen an outsized amount of new construction. One city where the hospitality sector is showing weakness in New York City, notes Myers. “In 2017, occupancy rates in a lot of markets will weaken or have hit their peak,” he adds.

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