The national hotel construction pipeline is declining as higher interest rates and investor uncertainty curtail developer enthusiasm. Nevertheless, a number of smaller hotel markets are seeing an outsize effect from new supply. This influx could affect occupancy performance going forward, if demand does not keep pace with the supply growth.
Of the largest 110 metropolitan areas tracked by STR, CoStar’s hotel benchmarking company, over 20 show supply growth that would increase existing supply by over 4%. The national average stands at 2.8%. It is likely that the rooms under construction now will open over the next 24 months, so the annual supply growth is just half of the total.
Of the markets with the strongest supply growth, six are in Florida, three in Tennessee and two in North Carolina. This activity in the South shows that developers want to take advantage of the rapid performance recovery during 2021 in the Sun Belt, which will likely fuel further development.
Twelve of 20 markets that show the largest supply increase are also located in the South. Five of the markets are in the top 25 largest hotel markets, likely a remnant of development decisions that were made prior to the pandemic. Nashville, Tennessee, and New York City are on the list of the markets with the largest expected supply growth and the most additions to the room stock, pointing to continued investor interest but is also expected to affect hotel performance.
Going forward, expect more development activity in secondary and tertiary markets in the Sun Belt and the South. Demographic changes and the continued ability for some workers to work remotely for stretches at a time will drive hotel demand, and developers are trying to capitalize on both trends.