Looking at all the hotels around us, one might think that all the developers are oversupplying the hotel market. But like the chicken or the egg concept, the need for hotels exists due to the demand of travel.
According to the data acquired from Smith Travel Research, (STR), occupancy rates for February 2017 was around 62.9 % compared to April 2018, which is at 68.1%. Even though there are hundreds of new hotels being built across the United States, there seems to be no fallback on national occupancy rates. That’s because hotel developers are strategically developing newer markets and different brands in other cities beyond New York, Los Angeles, and Chicago. Competition is steep and it’s difficult to find an empty lot to build your hotel in these bigger cities and their sub-markets, but developers are finding it equally rewarding in going out to underdeveloped cities where there’s less competition and much easier to get your property built.
Not only the occupancy has risen over the last year, but average daily rates (ADR) metric has also gone up. ADR is a metric used to gauge the average rental price per room. In April 2017, the ADR was recorded at $128.75, compared to 2018’s $130.81. Many critics and government staff speculate that increasing the supply of a product should drive its value down. In theory, it should! But as a matter of practical experience and reality, that isn’t always the case. Then what makes these hotels charge their customers more money? Not only that, but what convinces the customer that the rooms are actually worth the price he or she is paying?
It’s a simple answer, New Construction.
Newly constructed hotels includes the best of everything. The quality of the property and service are expected to be and typically are the best of that hotel class. New construction hotels are starting to go the extra mile and bringing the future to you by providing you with keyless entry to your hotel room using your mobile phone, ability to control your room’s temperature from your tv, and having fully interactive robots to obey your room service commands and toiletry item requests.
People around the world are willing to pay a higher rate in order to use these services, rather than staying at an older hotel where the cost might be slightly cheaper, but the level of service and amenities is nowhere near what a newly constructed hotel offers.
For anyone who wants to look at this subject from every critical angle, I think there is one more scenario worth playing out. Let’s assume for one minute that supply and demand of hotel rooms are balanced, would bringing more hotels into the market at that point help or hurt the economy? As we discussed above, people are willing to pay a higher ADR if they are offered higher quality properties. So it’s safe to say that newer hotels can help increase ADR. At the end of the day, it’s less relevant to hotel investors whether it’s ADR or Occupancy Rates that increase, they often look to a combined metric, Revenue Per Available Room, (RevPar). RevPAR is calculated by multiplying the ADR with the occupancy rate. So, technically new supply is still healthy in a balanced market, unless RevPar starts to decrease.