CBRE: Hotel Revenue Growth Driven by Overlooked Sources

Less expensive hotels and secondary markets are driving U.S. hotel revenue growth, reported CBRE Hotels, Atlanta.

“The hotel business is cyclical,” said CBRE Hotels Senior Managing Director R. Mark Woodworth. “The upper-priced properties led the U.S. lodging industry out of the recession and have continued to achieve occupancy levels in excess of 70 percent. However, recently it has been the lower-priced properties that have shown the greatest gains in revenue per available room.”

Woodworth noted that U.S. hotel RevPAR increased at a 5.7 percent compound annual growth rate over the past five years. “The only chain-scale close to achieving this pace of revenue growth was the economy segment, whose average annual RevPAR increase was 5.6 percent during this period,” he said. “That means independent and economy chain-affiliated properties have been the primary drivers of the industry’s recent strong performance.”

Looking forward, Woodworth said he expects this trend to continue. CBRE Hotels projects the overall lodging sector will achieve a 2.2 percent RevPAR growth rate between now and 2021. But for economy hotels the firm projects a 2.8 percent growth rate. “We recognize that economy properties still achieve the lowest levels of occupancy and average daily rates, but investors looking for a ‘growth story’ shouldn’t overlook this segment of the industry while some of the other chain-scale categories begin to stall out,” he said.

In addition to lower-priced hotels, smaller markets also are enjoying significant RevPAR increases, CBRE Hotels reported. In 2016, RevPAR growth in the top 60 markets averaged 2.8 percent, well below the aggregate 3.6 percent RevPAR growth achieved by hotels located outside of the top 60 markets. Woodworth said he expects that performance gap to widen.

“So much attention is being paid to the major urban and gateway markets,” said Cornell University School of Hotel Administration Professor John Corgel. He noted that more than three-quarters of new hotel rooms forecast to open this year will be in the top 60 major markets though these markets represent less than half of the overall national hotel inventory. “The increased competition in major markets certainly helps explain why these markets have recently lagged in RevPAR growth and are expected to continue to suffer in the near term,” he said.

Lodging Econometrics, Portsmouth, N.H., reported that the markets with the largest hotel construction pipelines include New York with 30,541 rooms underway, Houston with 18,373 rooms, Dallas with 17,291 rooms and Nashville, Tenn. with 14,873 rooms in the queue.

“Since the fourth quarter of 2011, New York has continuously had the highest project count of any market in the pipeline, while Houston has had the second largest for the last thirteen quarters,” said Lodging Econometrics Senior Vice President JP Ford.

Though the hotel sector has outperformed for a long time, opportunities still exist, Woodworth noted. “Investors just need to investigate some of the historically overlooked chain-scale and geographical segments to find better returns,” he said.