Too much new hotel supply not a concern—yet

PKF Hospitality is assuaging any hotelier's fear of new supply damaging record demand.

According to the recently released March 2014 edition of PKF Hospitality Research' Hotel Horizons forecast report, the U.S. hotel occupancy rate will finally recover to pre-recession levels in 2014. Given this level of performance, many in the industry are starting to worry about oversupply.

But Mark Woodworth, president of PKF, is assuring industry folk that there is no need to be overly concerned right now. "Anyone that was around in the 1980s and 1990s remembers the dramatic negative impact overdevelopment can have on the lodging industry," he said. "Fortunately, we see a different scenario evolving during the current property cycle. According to Smith Travel Research, the long-run average annual change in supply has been 2.0 percent. We do not see the national annual supply growth exceeding that level until 2017."

Not only are the forecast percent changes in supply lower than historical averages, so are the actual counts of new rooms entering the market. "During past expansions, we have seen three to five consecutive years of 100,000 or more net new hotel rooms entering the market. Our current supply forecasts for the next three years are well below that threshold," Woodworth said.

The Economics Are Not There
"The model we have developed to forecast supply incorporates several industry performance and economic variables," said John B. (Jack) Corgel, the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. "One of the key inputs is inflation adjusted pricing, or real average daily rates (ADR) in lodging parlance. Because of the discounting that occurred during the recession, real ADR is not projected to reach pre- recession levels until beyond 2015, thus suppressing the financial feasibility of new development projects in the near term."

"We hear many people complaining that room rates have not risen fast enough. While this may have muted the profitability of lodging assets the past few years, the resulting lack of new supply allows for some very favorable forecasts of future performance," Woodworth noted.

Based on the March 2014 Hotel Horizons market forecast, PKF-HR is projecting a 12.7-percent increase in unit-level hotel profits (NOI) in 2014 and another 14.5 percent in 2015. This will cap a five year run of double-digit gains on the bottom-line, a span not seen since the 1970s.

Local Construction Activity
While supply growth is limited on a national level, PKF warns that some markets across the U.S. are seeing meaningful increases in new competition. Over the next two years, the inventory of hotel rooms in New York; Austin, Texas; Nashville, Tenn.; Pittsburgh, Pa.; West Palm Beach, Fla.; and Miami are all projected to increase in excess of four percent.

"The relatively high construction activity in these locales might concern the hotel owners in these markets. However, despite all the new rooms entering their cities, occupancy levels are forecast to remain above their long-run average through 2018," Woodworth said.

Strong Fundamentals
Strong increases in lodging demand continue to support the supply growth that is occurring. PKF-HR is forecasting the number of accommodated room nights in the U.S. to increase by 2.6 percent in both 2014 and 2015. With demand growth outpacing supply, the national occupancy level will continue to increase through 2015, resulting in six consecutive years of gains in this metric.

With occupancy levels rising, hotel managers should be able to become more aggressive with their pricing. PKF-HR is forecasting ADR to increase by 4.9 percent in 2014 and another 5.7 percent in 2015.