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Growth Levels Off for the Hotel Sector

Growth Levels Off for the Hotel Sector

Things are very good for the hotel industry—though they may not get much better.

“We don’t see a lot of occupancy growth,” says Jan Freitag, senior vice president for STR, a hotel research firm based in Hendersonville, Tenn.

Hotels continue to break records for performance, but competition from new properties under construction is likely to keep performance from improving much beyond than its current level.

Hotels will have another record-breaking year in 2016, according to STR.

“The number of rooms sold is at an all-time high,” says Freitag. “This is the highest annualized occupancy rate ever recorded.”

Hotel rooms will be occupied 65.7 percent of the time, on average. That’s just slightly higher than in 2015—when the occupancy rate averaged 65.3 percent, another record-setting year. The hotel business in the U.S. is expected to keep improving its performance through 2017, according to the latest projections from STR.

It’s possible that the average occupancy rate may rise even a little higher before dipping downwards. However, the occupancy rate is likely to start inching downwards. That’s largely because hotel developers have started construction on many new hotel properties.

“Construction is picking up,” says Jeff Myers, manager of U.S. market research for CoStar Portfolio Strategy. “That is going to cause occupancy to lose ground.”

CoStar anticipates a two- to three-point decline in average occupancy rates over the next five years, assuming no recession hits the U.S. economy and hurts demand for hotel rooms.

Don’t cry for hotels, however. Even with a slight potential decline, average occupancy rates are still very high.

“The occupancy rate is likely to remain above the historic average for the next five years,” says Myers. CoStar, which keeps its own occupancy data, recorded an average 71 percent occupancy rate in the second quarter, compared with a historic average of 66 percent.

Developers build big

This year, developers are expected to open enough new hotel rooms to increase the U.S. inventory by 1.7 percent, according to STR. That’s a substantial increase from 1.1 percent added to inventory in 2015. Next year will be even busier, as developers open enough new hotels rooms to increase the U.S. inventory by 1.9 percent, according to STR.

“Nothing lasts forever,” says CoStar’s Myers. “New construction has really started to limit occupancy and revenue growth.”

With occupancies stabilizing, hotels will have to find their income growth by raising their daily room rates. The hotel business is forecast to report a 4.0 percent increase in average daily room rate to $124.86 and a 4.4 percent increase in revenue per available room to $82.07, according to STR. That’s significant growth—much faster than inflation. However, hotel investors have gotten used to even faster revenue growth, goosed by rising occupancy rates.

“In 2014 and 2015, growth was driven by growth in both room rates and occupancy rates,” says Freitag. “Those days are behind us. We won’t see a lot of growth in occupancy rates.”

Slower revenue growth may put some pressure on the companies that operate hotels. “Wall Street values growth… the heyday of growth is behind us.”

Some metro areas are in very different positions. “If you’re in New York City, Houston or North Dakota—in any oil or fracking market—life is pretty rough right now,” says Freitag. “If you opened a hotel in San Francisco or Nashville two year ago, you look like a rock star now.”

Even within the same metro areas, the performance of hotels varies widely based on their locations. “It varies completely with what street corner you are on,” says Freitag. 

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