New supply to continue to impact ADR in 2017

It has been very interesting analyzing the performance of the U.S. lodging industry during the first half of 2016. On the one hand, we are comforted by the continual growth in accommodated demand. On the other hand, there continues to be a disconnect between the record occupancy levels and the inability of hoteliers to increase room rates.

Based on the first-half performance data, CBRE Hotels’ Americas Research adjusted its annual forecast for the rest of the year. According to the firm’s September 2016 Hotel Horizons forecast, U.S. hotels will enjoy a 0.1-percent increase in occupancy in 2016. This will result in an annual occupancy level of 65.5 percent, a new all-time record. However, given the sluggish average-daily-rate growth observed during the first half of the year, room rates for the year are now forecast to increase 3.5 percent, a 0.8 percentage point reduction from our June 2016 Horizons forecast report.

Because changes in ADR have an overweighted impact on profits, it is the metric most closely monitored by owners and operators. That is why everyone is disappointed with a reduction in the outlook for ADR, especially with such high occupancy levels.

An analysis of ADR growth in each of the 60 markets in the Hotel Horizons universe finds a fairly consistent relationship between changes in supply and changes in ADR during 2016. On average, the 25 markets projected to experience a supply increase greater than 2 percent are forecast to achieve an ADR rise of 2.2 percent. Conversely, the remaining 35 markets should enjoy an average ADR gain of 4.1 percent. The 2-percent mark was chosen because that is the long-run average annual change in supply for U.S. hotels.

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The pace of ADR growth is projected to pick up in 2017. CBRE Hotels’ Americas Research is forecasting a 4.1-percent increase in ADR next year. The following paragraphs summarize the highs and lows of the 2017 forecast performance for the 60 Hotel Horizons markets

Supply and Demand

The Texas markets of Austin, Dallas and Houston, along with New York City, continue to attract the attention of developers. The addition of Albany, N.Y., to the list of top development markets in the nation is emblematic of the spread of new hotel construction across the country. No markets are forecast to see a decline in supply in 2017. However, hoteliers in five markets will see less than a 1-percent increase in new competitive rooms.

The high levels of occupancy in New York and Austin indicate a significant level of unsatisfied demand. Accordingly, the supply growth rates of 6.1 and 7 percent respectively will enable demand in these markets to increase by approximately 5 percent in 2017.

High occupancy levels, with limited amounts of new supply, will suppress demand growth rates in markets like Oahu and San Francisco. Other markets lagging in demand growth in 2017 will be Richmond, Va.; Charlotte, N.C.; and Norfolk-Virginia Beach, Va.

Other Metrics

Changes in supply not only influence ADR, they also impact changes in occupancy. Three of the markets forecast to experience the greatest increases in supply in 2017 are also projected to see the greatest declines in occupancy. They are Austin, Albany and Houston. Conversely, hotels in Salt Lake City; Albuquerque, N.M.; and Tucson, Ariz., will benefit from low supply growth and enjoy significant gains in occupancy.

The Northern California lodging markets should continue to thrive in 2017. Hotels in Oakland, San Jose-Santa Cruz and Sacramento are all forecast to enjoy room-rate increases of 6 percent or more during the year. Continuing to buck basic economic theory, the Nashville market is projected to see a healthy ADR increase of 6.7 percent in 2017 despite a relatively strong 5.7 percent increase in supply.

Supply growth will stifle ADR increases in New York, Albany and Houston. Declining occupancy levels will force hotel operators in Memphis, Tenn., and Pittsburgh to rethink their plans for increasing room rates.

Disappointment

Hotel owners and operators are disappointed by the downgrade to our forecasts following a slow start to the year. Occupancy growth has peaked and ADR gains are decelerating. Through it all, it is important to note that we are forecasting continued, less volatile revenue and profit increases for the foreseeable future. That is not a bad combination.

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