Warning Sign: Hotel Sector Sees First Year-Over-Year Occupancy Drop Since 2009

Occupancy rates for U.S. hotels declined 0.5 percent during the first quarter of 2016, causing the first year-over-year decline since the fourth quarter of 2009, according to hotel data research firm STR. The Hendersonville, Tenn.-based company suggests that the industry has passed the inflection and is forecasting hotel occupancy declines in both 2016 and 2017.

The national occupancy rate dropped from 61 percent in first-quarter 2015 to 60.7 percent in first-quarter 2016.

The information was included in CBRE’s annual Hotel Horizons report, which suggests that new supply is outpacing hotel demand nationwide. Supply increased by 1.5 percent from first-quarter 2015 to first-quarter 2016, but demand only increased by 1 percent over the same time period.

The report is not all bad news, however. CBRE predicts the average daily room rate (ADR) will increase by 4.3 percent in 2016, and another 4.9 percent in 2017. This increase in rates will offset the projected decline in occupancy, and result in an increase in revenue per available room (RevPAR) of 4.2 percent and 4.7 percent in 2016 and 2017, respectively.

The numbers are modest compared with the 6 to 8 percent RevPAR increases of recent years, but positive nonetheless.

“The first-quarter decline in occupancy is a concern for U.S. hotel owners and operators,” say Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “It is important to note that U.S. lodging demand did grow during the first quarter of 2016. We are simply at that point in the cycle when supply growth is outstripping demand.”

The influx of new supply is, in fact, due to the sector’s strong performance, according to the report. Developers who were sitting on the sidelines for many years saw record-high occupancy rates as a signal that it was time to start building again.

Hotel Supply vs. Demand

New supply increases versus occupancy decreases in the most affected markets and subsectors of the hotel industry. Click to view larger.

The five U.S. lodging markets forecast to experience the greatest declines in occupancy in 2016 — Pittsburgh, Houston, Omaha, Miami and Austin — will average a 6.3 percent increase in supply during the year.

Upscale hotels are forecast to experience the greatest decline in occupancy among all subsectors primarily because of a 5.3 percent increase in supply over 2016 and 2017. CBRE predicts economy hotels will see the greatest RevPAR increase during this same time period.

“Supply growth is occurring, but our projections do not approach the historical levels of new construction activity observed in the late 1980s, 1990s and 2000s. We do not foresee a supply-driven industry downturn,” says Woodworth. “The industry has passed the uphill recovery phase of the cycle, and we are now in a prolonged period at the top.”

“Looking forward two to three years, we do not see any reason why U.S. hotels should not continue to enjoy gains on both the top and bottom lines, albeit at a more modest pace compared to the past two or three years,” concludes Woodworth.

— Jeff Shaw

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