Most hoteliers and industry analysts are aware that overall U.S. industry room supply growth has been muted over the past few years. After jumping 2.4% in 2008 and another 2.8% in 2009, supply growth slowed dramatically in 2010-2012 and is now beginning to slowly trend north again. Total U.S. industry room supply is expected to increase less than 1% when final full-year 2013 numbers are tallied, and another 1.2% in 2014—both years well below the industry’s long-term annual supply growth rate of 2%. Low supply growth has definitely contributed to the industry’s recovery and should continue to exert a positive influence. If STR’s long-term outlook holds, the U.S. industry will have experienced six consecutive years of below-trend supply growth, from 2010-2015. Not surprisingly, annual RevPAR (revenue per available room) growth increased from 2010-2013 and is expected to continue in 2014 and 2015.
While the overall supply picture is bright, some markets will experience fairly significant supply increases which could exert pressure on existing hoteliers and potentially rein in operating performance. The nearby chart details 10 selected Metropolitan Statistical Areas (MSAs) where the number of hotel rooms currently under construction is 2% or more of the existing supply base. Some of the rooms under construction in these markets will come on-line in 2014, and some will open after that. Regardless of when they open, this new supply will pose challenges to existing hoteliers. Let’s take a quick look at three of these markets for insights on what might be expected.
With just over 14,000 rooms currently under construction, the New York-Northern New Jersey-Long Island MSA is experiencing—by far—more construction activity than any other U.S. market. Over 80% of these under-construction rooms are located in New York City or the immediate area. From 2010-2013, annual supply growth in the New York market averaged 4%, occupancy increased at about 2.5% and RevPAR gained over 7% annually. Over 10,000 new rooms are scheduled to open sometime in 2014, and annual room supply growth in the market is expected to spike over 7%. STR is currently forecasting an occupancy decline of 2.5% in the market for full-year 2014 and RevPAR growth of about .5%. Supply growth above the long-term trend is also expected in 2015, which could provide headwinds for ADR (average daily rate) increases.
The Houston-Sugarland-Baytown MSA currently has about 2,100 new rooms under construction, with 60% of these rooms located in the city of Houston. Annual supply growth in the Houston market averaged 2.3% over the past four years, with average annual occupancy increases of 5.8% and RevPAR growth averaging 8.5%. Most under-construction rooms are expected to open in the back half of 2014, and STR has forecast full-year supply growth of about 2%. Market occupancy is expected to decline 0.6% while RevPAR growth of 3.6% is anticipated in 2014. With over 3,500 rooms in the final planning stage, supply growth is expected to continue at an increased rate in 2015.
Hotel room construction in the Seattle-Tacoma-Bellevue MSA totals over 1,200 rooms with about 40% located in Bellevue; none of the current construction activity is located in the city of Seattle. Supply growth in the Seattle market averaged less than 1% from 2010-2013 with average occupancy growth of 4.5% annually over the same period. RevPAR gains averaged a very healthy 7.6% annually during the four-year period. STR expects supply to increase about 1% in 2014, with an occupancy increase of 2% and RevPAR growth of about 7%. Higher room supply growth is forecast for the Seattle area in 2015 as projects currently in the final planning stage break ground and move into construction.
Increased room supply growth should not threaten the total U.S. industry’s upward momentum, at least for the next couple of years and possibly beyond that. However, pockets of new construction will undoubtedly pose challenges to existing hotel operators and owners. The markets profiled in this article, along with others, will experience or have experienced fairly significant room new supply growth. It remains to be seen how these markets and others will fare in 2014 and beyond with the influx of new hotel rooms—time will tell.