Rebound in Phoenix market leads to new hotel development

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The Phoenix hotel market was slow to recover from the recession, but it is back on track again. Performance metrics are up, the transactions market is healthy, and the development pipeline is surging.

“Phoenix finally started to break out of its rut in 2014,” said Ryan Wall, VP, consulting and valuation at HVS. “The Super Bowl at the beginning of this year helped to expedite that growth, and it’s been a very strong year across all submarkets.”

During the second quarter, revenue per available room in the metro Phoenix market rose 8.1 percent on a 3.7-percent increase in occupancy and a 4.3-percent rise in average daily rates. In August, Phoenix led the top 25 hotel markets in the United States with a 4.9-percent increase in occupancy.

The Super Bowl, which was held in Phoenix on Feb. 1, was the hotel market’s high-water mark for performance. On Jan.31, RevPAR in the city was $324.87, the highest ever recorded in metro Phoenix. Occupancy from Thursday through Sunday of Super Bowl weekend was 91.5 percent, up 40 percent from the same period a year earlier.

Group leads the market

According to Wall, four factors drive the Phoenix hotel market, with group business being the most important.

“Group is first and foremost the king of the market,” he said. “If you look at the resort component of the market, as well as downtown, these markets need group business to be strong in order to operate at a high level. That was the piece that was missing over the past few years, but recently it has started to come back, both from an in-house group perspective as well as city-wide conventions.”

Other catalysts for hotel business in the market include the aerospace industry, healthcare and Arizona State University in suburban Tempe, Wall said.

The development pipeline

With performance metrics on the upswing, developers are again looking in the Phoenix area to build new properties.

According to Lodging Econometrics, 42 hotels with 5,370 guestrooms are under development in the market. The rooms under development represent 8.5 percent of the market’s current supply.

More than half (31) of the hotels in the pipeline are currently under construction or will begin construction in the next 12 months. The upscale and upper-midscale chain segments constitute a majority of the pipeline, with 15 upscale properties and 16 upper-midscale hotels under development.

Five hotels are scheduled to open this year, with seven more next year, and 17 properties each in 2017 and 2018 and beyond.

Most of the new development is happening in suburban markets. In Tempe, for example, groundbreaking is scheduled in November for a 237-room Kimpton boutique hotel in a new mixed-use development. A joint venture between Douglas Wilson Companies and Hensel Phelps Development is building the hotel, which is scheduled to open in 2017.

According to Wall, plans for a public-private partnership to develop a full-service conference hotel in Tempe fell apart last year, but he believes another full-service hotel in Tempe might eventually be built.

A couple of development projects are under way in downtown Phoenix. One is a $60-million transformation of an historic office building into a 170-room Hilton Garden Inn. Another project is the development of a dual-branded Courtyard by Marriott and Residence Inn.

Scottsdale, an upscale suburb, is Phoenix’s largest hotel submarket with 80 properties and more than 15,000 rooms. Five hotels are under development in Scottsdale with two scheduled to open next year.

“There’s always interest in hotel development in Scottsdale, but the issue is availability of land and the price of land that is generally prohibitive to development,” Wall said. “But now that we’re seeing occupancies and rates improving and doing so year over year, those sites will become more attractive to developers. Most of the stuff proposed in Scottsdale is along the 101 freeway on the east side of town, and most of it is limited-service.”

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