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PKF Analysts Dispel Overbuilding Concerns in U.S.

Wednesday March 19th, 2014 - 10:02AM

ATLANTA—According to the recently released March 2014 edition of PKF Hospitality Research, LLC’s (PKF-HR) Hotel Horizons forecast report, the U.S. hotel occupancy rate will finally recover to pre-recession levels in 2014. Given this level of performance, many industry participants are starting to worry about that an oversupply of new lodging units may be in the future.  

“Anyone that was around in the 1980s and 1990s remembers the dramatic negative impact overdevelopment can have on the lodging industry,” said R. Mark Woodworth, president of PKF-HR. “Fortunately, we see a different scenario evolving during the current property cycle. According to Smith Travel Research, the long-run average annual change in supply has been 2.0%. We do not see the national annual supply growth exceeding that level until 2017.”

Not only are the forecast percent changes in supply lower than historical averages, but so are the actual counts of new rooms entering the market. “During past expansions, we have seen three to five consecutive years of 100,000 or more net new hotel rooms entering the market. Our current supply forecasts for the next three years are well below that threshold,” Woodworth added.

 John B. (Jack) Corgel, PhD., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR, said, “The model we have developed to forecast supply incorporates several industry performance and economic variables. One of the key inputs is inflation adjusted pricing or real average daily rates (ADR) in lodging parlance. Because of the discounting that occurred during recession, real ADR is not projected to reach pre-recession levels until beyond 2015, thus suppressing the financial feasibility of new development projects in the near term.”

 While supply growth is limited on a national level, it should be noted that some markets across the U.S. are seeing meaningful increases in new competition. Over the next two years, the inventory of hotel rooms in New York, Austin, Nashville, Pittsburgh, West Palm Beach and Miami are all projected to increase in excess of 4%, according to PKF.

“The relatively high construction activity in these locales might concern the hotel owners in these markets. However, despite all the new rooms entering their cities, occupancy levels in New York, Austin, Nashville, Pittsburgh, West Palm Beach and Miami are forecast to remain above their long-run average through 2018. This is an indication that current hotel development activity is being driven by market demand, not the artificial tax and financing incentives or excess liquidity that caused overbuilding during past recovery periods,” Woodworth stated.