Despite the continuation of demand growth and record occupancy levels, concerns persist about the level of room-rate increases. The annual change in average daily room rates for the U.S. lodging industry dipped below the 3 percent long-run average in 2017 and is forecast to remain suppressed through 2022. During this same six-year period, the national occupancy level is projected to average 65.7 percent, nearly 3.5 percentage points above the 62.3 percent long-run average.
To find some solace, industry participants should direct their attention to the pricing dynamics CBRE is observing at the local market level. Based on data presented in the December 2018 edition of “Hotel Horizons,” we find a correlation between the occupancy level, changes in occupancy and changes in ADR in the 60 markets within the Horizons universe. In summary, markets with the greatest increases in ADR are those with the highest occupancy levels and strongest changes in occupancy. It is apparent that property-level operators in high-performing markets are taking advantage of the basics of supply and demand when setting their room rates.
Strong growth in lodging demand is enabling major-market operators to achieve this pricing power. While lodging demand for the entire U.S. market is forecast to increase 2.1 percent in 2019, the demand for accommodations in the 60 major markets covered by CBRE is projected to grow a stronger 3.3 percent.
The following paragraphs highlight the highs and lows of performance forecast for 2019 in the 60 Hotel Horizons markets.
Supply and Demand
The majority of hotel investment activity continues to occur in the nation’s largest cities. Supply growth in the 60 market Horizons universe (3.6 percent) is forecast to be almost double that of the nation as whole (1.9 percent).
U.S. hotel developers continue to show their extreme interest in the Nashville hotel market. Room supply in the Music City is projected to increase 9 percent in 2019. This is the greatest annual increase in supply for any market since coming out of the 2009 industry recession.
In 2019, the annual increase in the Denver hotel inventory will exceed 6 percent for the first time since 1999. The majority of the 7.9 percent growth in supply is occurring in the upper-priced chain-scale segments led by the 1,500 room Gaylord Rockies Resort & Convention Center, which was scheduled to open in December 2018. Other markets forecast to experience supply growth greater than 7 percent in 2019 are New York and Savannah, Ga.
After declining levels of supply in 2017 and 2018, development activity will pick up in the cities of Tucson, Ariz., and Albuquerque, N.M., but at a pace less than 0.5 percent in 2019. Hoteliers in Oahu, Hawaii; Richmond, Va.; and Anaheim, Calif.; will also see limited amounts of new competition during the year.
Fortunately for hoteliers in Denver, New York, Nashville and Seattle, a lot of the new supply in these cities will be offset by new demand. These four markets are projected to enjoy demand growth more than 6 percent in 2019. On the other hand, the three markets with the lowest levels of new supply will experience declining, flat or slightly positive changes in demand.
Occupancy and ADR
Supply is expected to grow at a greater pace than demand in 65 percent of our Horizons markets during 2019. Despite strong growth in demand, hotels in the cities of Savannah and Nashville will suffer declines in occupancy of 2.5 percent. Hoteliers in Dayton, Ohio, are forecast to experience a 2 percent decline in occupancy, and one of the lowest occupancy levels in the nation (61.2 percent).
Three Florida markets (Tampa, Jacksonville, Fort Lauderdale) top the list of markets forecast to enjoy the greatest increases in occupancy in 2019. Not only are the occupancy levels in these cities growing, but all three of these markets (plus San Francisco) are projected to achieve occupancy levels in excess of 70 percent. The Pittsburgh and Houston markets also will benefit from strong gains in occupancy, but levels in these cities will remain below 65 percent.
Despite the surge in new competition in the major markets, all 60 covered by CBRE will enjoy an increase in ADR. In fact, CBRE is forecasting ADR increases greater than the projected 2.2 percent pace of inflation in 39 of our 60 markets. Jacksonville; San Jose-Santa Cruz, Calif.; San Francisco; Newark, N.J.; and Atlanta are all lodging markets forecast to enjoy 4.4 percent or more ADR growth in 2019. Occupancy declines in excess of 1.5 percent characterize the 2019 performance of the three markets forecast to experience the least gains in ADR (Charlotte, N.C.; Charleston, S.C.; and Orlando).
Robert Mandelbaum is director of research information services for CBRE Hotels’ Americas Research. He is located in the firm’s Atlanta office. To learn more about the Hotel Horizons forecast reports for 60 markets in the United States, please visit pip.cbrehotels.com.