Real Threat of New Supply?
By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
At the recent Meet the Money® conference on hotel financing, Mark Woodworth, Executive VP of PKF Consulting, presented the latest report from PKF Hospitality Research to a crowd of more than 450 hotel industry leaders who gathered to connect with all the top debt and equity financing sources for hotels and hotel-related projects. Mark Woodworth's presentation helped answer the questions on everyone's minds: (1) Where are we in the hotel cycle? (2) What is the real threat of new supply? and (3) Where do we go from here?
His information and answers were very interesting . . .
The questions about the hotel industry that are on all our minds
(1) Where are we in the hotel cycle?
Mark Woodworth started things off by saying that "Things are great!"
Here is Mark's graphic demonstration of where
he thinks the U.S. hotel industry is in the cycle, and also where it has
been the past several Meet the Money® sessions.
Importantly, Mark notes that ADR has recovered and is still growing. (Note the long term trend lines for ADR and occupancy) Mark believes that the fundamentals are so good that although we are nearing a "peak," we may "plateau at the peak" for some time before riding into a down cycle.
As the following chart shows, in real terms, we
have not yet achieved any inflation-adjusted NOI growth from the 2000 levels.
This is one factor that has dampened the economic justification for new
hotel development, and consequent room supply growth during industry's
recovery over the past 5 years.
(2) What is the real threat of new supply?
But what about the threat of new supply? The hospitality industry is one that usually creates its own speed bumps by overbuilding, driving up supply faster than demand, and then watching crumbling economics. Certainly we have seen a kick up in supply, but will the results be different this time?
PKF research shows that there has been an incremental
increase in the current construction pipeline, but Mark says, "We are nowhere
near the last decade's level of product under construction." And here is
Mark's slide comparing the year-to-year increase in supply during the decade
of the 1990s to the current decade. PKF believes that new construction
will accelerate, but at levels well below what the industry saw the last
And a major reason that supply growth has dampened is the prohibitive cost of new construction, which as PKF notes, have gone up, but are unlikely to go down.
The practical, real-world consequences of all this is shown in this fascinating pair of supply and demand charts that puts supply and demand changes in perspective over the past 20 years across the top 52 U.S. markets.
(3) Where do we go from here?
Mark told the assembly at Meet the Money® that, "This is a wonderful time to be in the hotel business!" The industry's performance the past few years has been exceptional. The strength of fundamentals continues to attract capital.
As supply ramps up, PKF sees a few high supply
growth markets, which include some historically difficult markets such
as Los Angeles, New York, Orange County, San Diego and Tucson.
Charlotte Ft Worth Houston Los Angeles Nashville Omaha Orange county Philadelphia Phoenix San Diego Tampa Tucson
PKF sees a slowing in the hospitality industry growth from the recent explosive few years, but compared to historic averages, things look good.
PKF's summary of our situation and prospects.
We couldn't agree more.
R. Mark Woodworth, President of PKF Hospitality Research can be reached at 404.842.1150 or Mark.Woodworth@pkfc.com. For a copy of PKF's "2007 Annual Trends" which is now available, contact Claude.Vargo@pkfc.com.
Please send me your thoughts at firstname.lastname@example.org.
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|Also See:||Demand Slowdown and The Hotel Supply Conundrum / PKF / April 2007|
|Industry Outlook: Looking Back on 2006 , Looking Forward to 2007 / Global Hospitality Advisor / December 2006|
|Lodging Econometrics Forecasts 1,079 New Hotels Will Open in 2008 / July 2006|
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