American hotel operators will have to contend with headwinds if the economy slows, but new supply likely won’t be much of an issue. At the end of the second quarter, the total pipeline for hotel rooms was 609,000 rooms, a drop from the 656,000 in the second quarter of 2019.
The latest forecast for supply growth projects an increase of 1.2% for 2023, below the long-run average of 1.7%. Last year, the supply growth was abnormally high, but this was the reverse of the sharp decline in 2020, when many hotels temporarily closed after the onset of the pandemic.
The number of rooms under construction has decelerated since the start of the health crisis, and the cause for the slowdown is multifaceted. On one hand, projects that were under construction opened, but those that were in the planning stages were postponed or scrapped altogether. Also, developers had a hard time getting financing as the hotel industry faced its most severe downturn ever recorded. And now that demand numbers are back to pre-pandemic levels, higher interest rates make underwriting of new projects more difficult.
Whereas the supply outlook for the nation is muted, some markets are experiencing an increase that could significantly affect performance going forward. New York has around 14,000 rooms under construction, by far the largest development activity of any market. Part of the reason is that some developers chose to break ground to get ahead of new rules that make future hotel developments in the city more difficult by requiring special permits. But New York operators have been reporting positive numbers throughout the summer, so the outlook for the markets, despite the new competition, is healthy.
Nashville, Tennessee, is experiencing a large supply influx of luxury hotels, led by the soon-to-open Four Seasons Hotel and Private Residences. The market has traditionally hosted large groups and events and saw strong weekend demand. The new higher-end-branded properties will likely lead to higher average marketwide room rates.
Markets that have in the past attracted strong business and group travel demand such as Atlanta, Chicago and Washington are also seeing new rooms, but they are still not fully recovered. Developers in these markets will open their properties in a less robust demand environment than when the hotels were conceived and so will likely not be able to realize their projected revenues.
While many developers and bankers are likely observing the macroeconomic trends with some trepidation, the hotel industry has proven that its demand is recession-resilient. Leisure-driven accommodations are in particularly high demand, and this will likely continue to attract regional developers who will make long-term bets on certain markets, no matter the current state of the economy.