Hotel industry vet and consultant Chuck Pinkowski is based in Memphis and has always had a keen eye on Nashville's lodging market. He talks to The Tennessean about why the hotel market there continues to be strong.
1) What's driving the interest in Nashville's lodging market and how long can it continue?
There's a lot of different demand generators that are driving the lodging market in Nashville. It is the state capitol. There is a very strong health care industry there. There's a strong university. Those are factors that typically create lodging demand and they're not as vulnerable to economic downturns as other markets. Add to that the tremendous strength of the music industry and the recent addition of the Music City Center and I think you have an unusual combination for strong growth in hotel demand.
2) How would you assess demand and supply for beds here now and in the future?
There are a lot of projects in the pipeline in Nashville. There's a large number of hotels in the planning stage, but not all of those will become a reality. The demand in the downtown market is extremely strong and will continue to be strong in the future. Occupancy will be strong and when another large full-service hotel enters the market, I think we will start to see the tempering of the strong occupancies.
3) Why is financing for larger hotel projects so difficult if there's so much demand?
(Demand) is proving out by the performance of the Omni. When that hotel originally was being planned, it was going to be 1,000 rooms or more. In the planning process, it got cut to 800 and although they're only open for about a year, what they're finding is they probably could have used more rooms to secure some bigger groups. The financing is difficult because the large hotels are much more complicated than a 120-room select-service Courtyard or Hilton Garden Inn. The development cost for the large hotels is significantly greater than the cost-per-room on select-service hotels. Plus, the biggest challenge on the large hotels is that the net operating income generated from the large hotel usually is not sufficient to cover the traditional debt service for the project. That's why the big projects usually are looking for some kind of financial assistance for their development.
4) At what point should we get concerned about potential saturation?
When new additions to the market result in occupancies slipping to the point where it begins to affect average rates, that's a period of concern.
5) How does Nashville's lodging market compare to peer cities such as Indianapolis and Louisville?
When you look at the top 25 markets that STR tracks, Nashville is at the top in terms of percentage growth of revenue-per-available-room this year over last year. And that includes cities like Denver, New York City, Orlando, San Francisco, Houston and Dallas. And part of that strong growth is because right now you're comparing a market that includes the 800-room Omni hotel with very successful performance to last year when the Omni wasn't open. Add to that the increase in demand and revenues to the existing properties that have been in the downtown market for several years.