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Analyst Views Oversupply, Not Airbnb, as Bigger Potential Threat to U.S. Lodging Sector

Despite Emergence of Airbnb Adding to 17% Growth in Rooms Under Construction, Bigger Risk Seen from Potential Supply-Demand Imbalance
March 23, 2016
While all-time highs in hotel room occupancy and average daily rates made 2015 a record year for revenue per available room (RevPAR), according to Moody’s, the ongoing construction boom adding thousands of new hotel rooms threatens to create a supply-demand imbalance, the ratings analyst said in a report issued this week.

Adding to concerns over new construction levels is the emergence of home-sharing platforms such as Airbnb, although for now, over-building remains the greater of the two threats, Moody's analysts said.

According to hotel research firm STR, 497,409 rooms in 4,057 projects were under contract (in the construction, final planning and planning stages) in the U.S. as of last month. The total represents a 14.2% increase in the number of rooms under contract compared with February 2015.

For projects in the ‘in construction’ stage in the U.S., STR reported 150,406 rooms in 1,171 projects. That number of rooms represents a 16.7% increase in year-over-year comparisons.

"Demand growth is slowing and supply growth is picking up. As a result, occupancy gains are shrinking,” said Bobby Bowers, STR’s senior vice president for operations. “The increase in construction activity means more supply will come online at a point fairly late in the current cycle. The focus for hoteliers will be on whether demand can keep pace and how pricing will be affected.”

Moody’s Senior Analyst Jay Rosen said, "Given the construction that is currently planned or underway in the hotel sector, excess supply is the more likely near-term threat to traditional lodging.”

While online disintermediaries like Airbnb have had a remarkable growth trajectory, Rosen said those services mainly compete for leisure guests with lower-priced hotels that are unaffiliated with major hotel brands.

Room-sharing services are much less competitive with higher priced, traditional hotels, particularly those that offer conference facilities and amenities such as spas, room service, in-hotel dining and other services that appeal to corporate users, Rosen added.

And the higher-priced segment is where most of the new supply is coming. Among the segments, upper midscale (50,826 rooms in 514 hotels) accounted for the most rooms in construction followed by upscale (50,139 rooms in 363 hotels), according to STR.

“The upscale and upper midscale segments offer lower lending risk and lower barriers to entry,” Bowers of STR said. “More markets can accommodate these products and consumers like them. Supply growth in these two segments has led the industry for years and will continue to do so in 2016.”

Debate Continues on Airbnb Impact

While most lodging companies do not view Airbnb as a competitive threat to their businesses, recent analysis by CBRE Hotels’ Americas Research cautions the threat should not be taken lightly.

"It seems reasonable that Airbnb will impact hotels in two ways,” said R. Mark Woodworth, senior managing director of CBRE Hotels. “For existing hotels, the growth of average daily rates will most likely be curtailed. Airbnb (also) may be an impediment to traditional hotel construction and could reduce traditional hotel supply growth in many markets.”

The impact will likely be focused in the handful of markets where the service is most active, CBRE Hotels said. Between October 2014 and September 2015, more than 55% of the $2.4 billion generated through Airbnb bookings was captured in only five U.S. cities: New York, Los Angeles, San Francisco, Miami and Boston, representing a significant portion of the lodging revenues in these markets, CBRE Hotels noted.

Fitch Ratings also weighed in, saying Airbnb could exacerbate the effect of any future downturns in the U.S. lodging sector, saying Airbnb listings are likely to spike during recessions when more individuals may be expected to look for alternative income sources.

Fitch said there is some anecdotal evidence to suggest this is already occurring in high cost-of-living markets such as New York and San Francisco.

Lenders Taking Note of Risks to Hotel Fundamentals

Stonehill Strategic Capital LLC, a hotel financing affiliate of Peachtree Hotel Group that is set to post a record quarter of hotel lending, said it expects hotel underwriting will become more conservative going forward.

"Given where we are in the cycle, we believe there still is upside, albeit at a slowing pace, especially for seasoned owner/operators,” said Michael Harper, vice president of Stonehill Strategic Capital. (However,) "we believe the market will become more conservative as the year progresses, with higher interest rates and greater equity requirements," adding that he expects owner track records from earlier cycles will play an increasingly important role in lending decisions.

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