Hotel Sector Slowing; Development Costs Rising

After six years of occupancy growth, hotel sector performance may have reached the top of its cycle, reported HVS Global Hospitality Services, Mineola, N.Y.

“Occupancy has peaked and average daily rate increases have moderated to inflationary levels,” HVS Managing Director and Senior Partner Stacey Nadolny said in the firm’s U.S. Hotel Development Cost Survey 2016/2017.

Major hotel performance indicators show signs of slowing growth, HVS said. Average daily room rates increased just slightly in 2016 while occupancy remained flat.

Nadolny noted U.S. hotel room supply increased 4.7 percent between 2011 and 2016 while overall rooms sold grew by nearly 19 percent, “resulting in rising hotel occupancy and average daily rate levels that support the cost of new development,” she said.

But supply growth began to surpass demand growth in 2016. “With more options than ever before, hotel developers have been capitalizing on favorable market conditions. The new supply pipeline is beginning to make up for a relatively long period of modest supply growth,” Nadolny said.

Some markets, including Miami, Nashville, Tenn., New York and Seattle could see a 25-plus percent increase in hotel room supply over the next three years, with Nashville leading the way with a 30-plus percent expected supply increase.

Rising development and construction costs remain a major factor in new construction, the report said, noting many markets continue to experience double-digit hotel construction cost increases. “The primary factor in these rising costs is the shortage of skilled labor in major markets,” HVS said. “The high construction volume across all market segments has caused demand for these skilled workers to surge.”

The report noted a new trend in hotel development: modular construction. “Primarily used in residential housing, modular construction is making its way into the commercial sector,” HVS said. “While modular construction is not necessarily a cost-saving initiative from a labor and materials standpoint, the cost savings result from the shortened project timeline.”

Modular hotel projects can save two to three months in total construction time–as much as a 10 to 15 percent time savings, HVS said. “Modular construction has additional benefits, including waste, labor and theft reduction as well as the ability to serve remote areas,” the report said. “These units are also reported to have higher quality construction given that the modular units need to withstand travel to the worksite…we expect this trend to increase going forward.”