Elevated Hotel Construction Weighs on Some Major Markets

Significant supply growth and slipping projected demand are slowing some hotel markets, reported Moody’s, New York. 

Moody’s Red-Yellow-Green report, which examines the relationship between projected hotel supply and demand, stabilized in the upper yellow range at 61 in the second quarter after falling 15 points from the first quarter–the sector’s most significant negative score movement since first-quarter 2013, Moody’s said. 

“Red” markets score between 0 and 33 on Moody’s scale and show stress, while “green” markets that score between 67 and 100 reflect a healthy balance between hotel demand and construction.

“The driving force behind the deterioration of the hotel sector’s Red-Yellow-Green score is projected forward supply,” Moody’s said. Prior to fourth-quarter 2014, the hotel sector’s forward supply remained at or below 1.5 percent of existing inventory, Moody’s noted. “[Then,] starting in the fourth quarter of 2014, the hotel sector experienced a significant expansion of construction activity.” 

Hotel construction activity peaked at 3.6 percent of current inventory in first-quarter 2016, Moody’s reported. 

The third quarter ended with 4,796 hotel projects under construction, up 18 percent year-over-year, reported Lodging Econometrics, Portsmouth, N.H. Properties currently under construction will add 586,102 hotel rooms to existing stock nationwide, up 16 percent from a year ago. This represents the 18th consecutive quarter of pipeline growth, Lodging Econometrics said.

Expanding hotel inventory also put pressure on another component Moody’s examined, the year-over-year revenue per available room change, which has decelerated for the past six quarters. “This period of decelerating RevPAR growth corresponds to the uptick in construction,” Moody’s said.

Moody’s noted that four of the largest hotel markets, New York, Houston, Dallas and Miami, are experiencing forward supply growth that approaches twice the national average.”Each of these markets are in difference phases of the development cycle,” Moody’s said. The ratings agency also considers the individual market’s capacity to absorb new inventory. 

Dallas scored in the yellow range at 54 but is currently in an earlier stage of the development cycle than New York, Houston or Miami, Moody’s said. Forward supply started to increase over the past two quarters, which caused the city’s score to fall from 65 in fourth-quarter 2015. 

Houston’s score fell “precipitously” starting in fourth-quarter 2014 to Red 14, Moody’s said. A combination of strong supply growth and weak demand hurt the city’s rating. “Houston’s forward demand has been negative in every quarter since the fourth quarter of 2014,” Moody’s said. 

Houston’s adverse conditions also forced RevPAR to contract significantly and year-over-year RevPAR growth has remained negative for the last five quarters. “The current situation in Houston can be attributed to the struggles of the oil industry, which is facing depressed crude oil prices that have fallen below $50 per barrel in the current quarter from over $100 per barrel during the summer of 2014,” Moody’s said.

Miami has witnessed forward supply growth exceeding 4.0 percent in every quarter since fourth-quarter 2014, Moody’s said. Its rating fell to yellow 39.  “While demand has been positive in the period between fourth-quarter 2014 and the current quarter, high levels of forward supply have dragged on the market,” Moody’s said. 

This quarter also marked Miami’s first quarter of negative year-over-year RevPAR growth since 2010, Moody’s said. 

New York’s hotel market experienced forward supply growth exceeding 6.5 percent since fourth-quarter 2014, Moody’s reported. Over that period, demand has remained muted, with only two quarters of positive demand. Increasing supply and flat demand resulted in New York’s score falling to Red 22 in the current quarter from Yellow 68 in third quarter 2014. “With forward supply remaining elevated, year-over-year RevPAR growth will likely continue to decline,” Moody’s said.