CBRE: U.S. supply growth to peak in 2018

New U.S. hotel room supply is expected to peak this year, but that doesn’t mean hoteliers should be crying “downturn” anytime soon.

Based on the most recent edition of CBRE’s Hotel Horizons, experts are forecasting the net addition of about 101,000 new hotel rooms to the U.S. inventory during 2018, an increase of 2 percent over 2017 average annual daily supply. This is the largest number of new rooms to enter the market since the 130,000 rooms that came online in 2009, according to the data.

“According to STR, the number of rooms under construction in the domestic pipeline peaked in late 2017; the volume has steadily declined since then, a clear sign typical of ‘late-cycle’ behavior,” R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research, told Hotel Management.

“While history would suggest that an industry downturn may be in the near-term future, this is not likely the case this time around. The economy continues to exhibit favorable growth patterns, which is expected to result in ongoing increases in demand. Near record occupancy levels should persist for the near-to-midterm,” he said.

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In 2018, 42 of the 60 markets covered in the Hotel Horizons dataset forecasts are projected to see an increase in supply greater than the 2-percent national average, and Woodworth said these are the markets most vulnerable to negative impacts on performance.

In these 42 markets, occupancy levels are projected to decline 0.6 percent on average. Meanwhile, average daily rate is expected to increase 2.4 percent, according to the data. Both measures are below the average changes estimated for the remaining 18 markets. During 2018, hotels in the markets that are forecast to see a supply change of less than 2 percent should experience increases in both occupancy (+0.2 percent) and ADR (+3.4 percent).

“Demand growth in 2018 is expected to slightly lag the increase in supply; thus, a slight decline in the industry occupancy level is expected,” Woodworth said. “The industrywide ADR increase will be driven by those markets—mostly secondary and tertiary in nature—in which demand growth will outstrip the increase in supply, thus proving for favorable pricing power. 

“Inflation is also expected to be greater in 2018 than it was in 2017, and this will contribute to the gains in prices as well,” he said.

Oversupply Concerns?

Beyond 2018, CBRE expects the pace of new hotel construction to hover around 2 percent. However, the number of net new rooms per year is forecast to taper, which Woodworth said is the natural progression after years of slight occupancy decreases and slowing ADR growth.

He said hoteliers shouldn’t start talking about oversupply concerns just yet.

“Thirty-six of the 60 U.S. markets in our Hotel Horizons forecast universe are expected to experience a year-over-year decline in occupancy in 2018. In almost all cases, these declines will be very modest at less than 1 percent,” he said, adding that the decreases will be greater in Nashville, Houston and Savannah, Ga., because of the large number of rooms entering those markets. 

“In no cases, however, do we believe that the market will be ‘overbuilt.’ The slowing development pipeline noted suggests that this will also not be the case beyond 2018,” he said.

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CBRE is forecasting a national average occupancy rate of 65.8 percent, down slightly from the 65.9 percent achieved in 2017. National occupancy levels are forecast to remain flat in 2019 and decline in 2020.

“The declines in occupancy forecast by CBRE for 2018 are not solely attributable to the increases in supply,” John B. Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research, said in a news release. “We also are forecasting demand growth slowdown from 2.7 percent in 2017 to 1.8 percent in 2018.” By contrast, the annual demand growth rates were 1.5 percent in 2016 and 2.5 percent in 2015.

A strong final three months of 2017 in terms of performance boosted the annual national occupancy rate 0.9 percent to 65.9 percent, which was another record occupancy level, according to STR. With national ADR increasing 2.1 percent, revenue per available room grew 3 percent in 2017. ADR is forecast to increase 2.6 percent in 2018, then drop to 2-percent growth in 2019 and 1.7 percent in 2020.