The U.S. hotel market continues to gain strength following the Great Recession, where in 2009, revenue per available room (RevPAR) fell by 17 percent making it the single-worst performing year in the history of the hotel industry. Atlanta, which is one of the top 25 hotel markets in the U.S., as defined by Smith Travel Research (STR), the hotel industry’s leading performance data provider, experienced a similar decline with RevPAR falling by 18 percent in 2009.
Since that time, across the country RevPAR has grown at a compounded average growth rate (CAGR) of 6.4 percent. Atlanta’s RevPAR CAGR during this time period has been 6.1 percent. The main reason Atlanta’s recovery has trailed the nation is related to its average daily rate (ADR). Atlanta’s ADR CAGR has been just 1.3 percent since 2009 as compared to 3 percent for the U.S. Put simply, hotels in Atlanta have not been able to grow their average rate as much as the U.S. average coming out of the recession.
The Atlanta hotel market, like other segments of the Atlanta real estate market, has historically tended to get overbuilt when times are good. While hotels often do not represent the “highest and best use” for a development site (on a per square foot basis, hotels are typically the most expensive product type to build), there have always been developers able to secure a site, a brand and a loan — the three components necessary to build a hotel.
Atlanta’s inability to vigorously grow ADR has historically been due to oversupply, which depresses occupancy and does not allow for market compression during periods of peak demand, when operators charge higher rates. Between 1987 and 2013, supply in the market has more or less equaled demand, leading to almost no growth in occupancy. While some years have been better than others, overall occupancy in Atlanta has been flat in the 62 to 63 percent range. Typically, in order for a market to experience meaningful rate growth, occupancy must advance to 65 percent or beyond. The last time Atlanta experienced significant ADR growth was in 2006, when occupancy reached 64.2 percent. This statistical point shows that a slight uptick in occupancy can have a dramatic impact on a hotel owner’s ability to raise rates.
Hotels, like all types of real estate, are cyclical. Typically these cycles are measured from trough to peak. During previous cycles (1994-2000 and 2003-2008), Atlanta’s RevPAR growth trailed the U.S. 2 to 4.5 percent and 5.3 to 5.6 percent, respectively. Atlanta’s RevPAR growth is trailing again in the current cycle (2009-present), so why do we believe this cycle will be different and allow Atlanta to outpace the U.S. average? The answer lies in supply and demand.
Between 2009 and 2013, demand outpaced supply in the U.S. 4 percent to 0.9 percent per annum. During this same period, demand outpaced supply in Atlanta by a CAGR of 5 percent to 0.2 percent. Demand in Atlanta has been 25 percent stronger than the U.S. average while there has been almost no growth in supply. As a result, Atlanta has seen market occupancy increase from a cyclical low of 54.5 percent in 2009 to 62.3 percent in 2013. With limited new supply forecasted for city’s main hotel submarkets (downtown, Midtown, Buckhead and the Central Perimeter), occupancy should continue to grow toward that all-important 65 percent benchmark, allowing hotel operators to drive ADR, leading to higher RevPAR and ultimately higher net operating income and value for owners.
Downtown
Aside from historic demand generators like the Georgia World Congress Center, AmericasMart, Centennial Olympic Park, The Georgia Aquarium and World of Coke, in the next year, The College Football Hall of Fame and National Center for Civil and Human Rights will open, creating additional leisure demand for downtown.
The Hyatt House currently under construction spans 150 rooms. The Procaccianti Group is developing this upscale select service hotel on a site that is catty-corner to the aquarium at Ivan Allen Boulevard and Luckie Street. The hotel is expected to open in the first quarter of 2015.
Aloft, which recently opened on April 3, spans 254 rooms. Banyan Investment Group, in association with DeBartolo Development, transformed the former Days Inn at 300 Spring St. into Starwood’s newest Aloft hotel. This does not represent an increase in supply, but rather an up-branding, which will benefit the entire downtown market.
The planned Homewood Suites will include 129 rooms. Legacy Property Group is building this all suites property at 331 Marietta St. near Centennial Olympic Park. Legacy announced the development in September 2013 but has not yet broken ground.
Midtown and Buckhead
There are currently no hotels under construction in Midtown, although Noble Investment Group of Atlanta successfully completed a gut renovation of the former Hotel Midtown (10th and Peachtree) and reopened the property as a 194-room Hyatt in July 2013.
Likewise, there are currently no hotels under construction in Buckhead, however The Loundermilk Companies LLC has announced plans to construct a new Hilton Garden Inn on a site adjacent to the Buckhead Theatre on Roswell Road.
Central Perimeter
The following three hotels represent the first new hotels developed in the Central Perimeter market in 15 years.
The Hyatt Atlanta Perimeter under construction will total 173 rooms. Legacy Property Group is developing a full-service Hyatt Hotel that will adjoin the conference center at Villa Christina. The hotel is expected to open this month.
The Homewood Suites under construction spans 114 rooms. Vision Hospitality and RevPar Development LLC are building this new property on a 1.2-acre site at Crestline Parkway and Mount Vernon Highway. The hotel is expected to open in late 2014 or early 2015.
The planned Hampton Inn and Suites will span 132 rooms. In December 2013, Hotel Equities announced plans to develop this hotel in the Sterling Pointe development off of Ashford-Dunwoody Road.
Additionally, Rockbridge Capital and Wischermann Partners spent a reported $20 million to convert the former W (and later the Atlanta Perimeter hotel) to the city’s first Le Meridien in February 2013. While not considered new supply, the fully renovated, 275-room Le Meridien established itself as the finest of the four-star hotels in the Central Perimeter market.
— By Jeff Berkman, Senior Vice President, Hodges Ward Elliot. This article originally appeared in the May 2014 issue of Southeast Real Estate Business.