With hotel industry at peak occupancy, where does it turn for growth?

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NASHVILLE, Tenn. — The hotel industry is hitting it out of the ballpark when it comes to occupancy rates, so where can it turn now to grow? That was part of the discussion at the Hotel Data Conference, here at the Omni Nashville Hotel.

In a general session entitled, “Boom or Gloom? Forecasting the Future of Hotel Performance,” supply growth took center stage.

Between June 2016 and 2017, rooms in construction increased 12.3 percent while the planned pipeline is up 11.3 percent and the pipeline of rooms under construction is up 11.6 percent. But rooms in construction are disproportionally dispersed across New York, Nashville, Seattle, Denver and Dallas where they respectively represent 12.8-percent, 12.1-percent, 10.9-percent, 10.4-percent and 9.1-percent increases in existing supply.

In Philadelphia, rooms under construction are just 5.6 percent of existing supply, dropping to 5 percent for Boston and 4.8 percent for Los Angeles. New inventory across all markets is largely concentrated in the upscale segment where supply grew 6 percent in the first six months of 2017, outpacing 5.3 percent of demand growth in the same time period.

In the upper midscale segment, 3.1 percent in supply growth in the same period approached the period’s 3.2 percent demand growth while growth in midscale supply trailed a 2-percent demand increase at 1.1 percent and, likewise, economy supply only grew at 0.2 percent compared with a 1-percent demand increase.

There is no question that the manner of pipeline growth is creating disparity between supply and demand. In speaking with HOTEL MANAGEMENT, STR President and CEO Amanda Hite posed the question: “On the demand side, we’re at peak occupancies, so how do we accommodate any additional demand and create additional demand when we already have more people traveling than ever before and can these trends continue?”

Healthy Demand

Demand is robust, so it would seem so for the foreseeable future, given that occupancy is expected to increase this year to 65.5 percent, from 65.4 percent in 2015 and 2016 and drop only slightly to 65.3 percent next year.

In the session, “Not All Markets Are Created Equal,” Patrick Mayock, STR’s senior director, research, development and education, pointed out that occupancy has remained very strong in metro markets, the top 25 of which are where most supply additions have occurred in the last 12 months.

But occupancy has been peaking in the 65-percent range throughout the country. The demand also skews toward leisure, which is price sensitive. Nevertheless, Hite attested that “the fundamentals are there for a very healthy industry in terms of growth for the next two years, barring any black swan event that can’t be anticipated.”

Challenges and Change

But not all growth is proving beneficial to the industry. Mayock noted that supply increases in urban markets include enough new select-service properties to drag down the prospects for RevPAR growth in traditionally high-RevPAR markets. Labor costs have climbed 23.8 percent since 2008, exceeding both RevPAR and ADR gains, the latter of which has increased 9.3 percent in the same period.

Hite noted that the issue is likely to pose further challenges to the industry over the next five years and force hotels toward greater efficiency and more productivity while getting costs down.

How exactly those improvements will come about remains to be seen, but in his keynote address, former Starwood Hotels & Resorts CEO Frits van Paasschen suggested the hotel industry not only embrace change, but own it.

“People hate change, but I think that’s a fallacy,” he said. “People will embrace change if they feel they have decision-making power and we need to make sure we don’t make our organizations recipients of change, but change agents if we’re going to survive a world of disruption.”