THERE’S MORE TO THE NEW SUPPLY STORY

While inflation and interest rates affect various industries and real estate asset classes across the country, inventory is very specific to individual hospitality markets and submarkets.

Too Much Supply? It Depends.

Obviously, the amount of new rooms coming online varies by city. But new supply also affects different markets in different ways. It’s easy to get caught up in supply numbers since they can be quantified in a straightforward manner, but let’s not forget that demand for rooms is also a key component of the age-old supply/demand relationship. While future hotel demand is harder to project, it might justify the new supply that is coming into many markets. For example, New York and Nashville are the two markets with the highest percentage of new product coming online at the moment, but it’s safe to say the new supply threat is much more concerning in New York, which has not yet recovered from COVID, than it is in Nashville, where hotel performance has exceeded 2019 levels. New supply is not always a bad or unnecessary thing, no matter how much we may be programmed to believe it.

Markets such as Nashville, Phoenix, Atlanta, Miami, Dallas, and Tampa, have experienced more new supply than Seattle, Chicago, San Francisco, Minneapolis, Boston, and Philadelphia. However, new supply is much more justifiable in the former group than the latter when considering demand trends in each market. These factors can include population migration, corporate relocations, tourist visitation, multifamily and office development and occupancy, and existing hotel market performance.

The Texas Example

Take Texas, for example, where our firm has been very active, with offices in Dallas and Houston and over 100 hotels sold in-state. Over the years we have repeatedly heard how new supply is a constant threat due to low barriers to entry and the abundance of land when it comes to building in many parts of the state. While these criticisms may be based in fact, they ignore the incredible demand growth Texas has experienced, justifying new hotel rooms. In Texas, hotel supply increased by 26.6% from year-end 2010 to May 2022. Over that same period, demand has increased by 41.2%, and the post-pandemic recovery is still ongoing in many parts of the state. So, yes, new supply is a constant in Texas, but so is new demand, to an even higher degree!

Austin has emerged as a major center for business, tech, government, and culture; the populations and economies of the Dallas-Fort Worth and Houston metroplexes continue to boom; San Antonio remains a military, convention, and tourist hub; smaller cities, university towns, and drive-to destinations like Amarillo, Waco, Lubbock, College Station, Corpus Christi, the Big Bend region, and the Hill Country are flourishing. All of these elements have led to demand outpacing supply in a big way in recent years across the state and offer a well-founded hope that incoming new supply will also be absorbed. The same dynamic is playing out in many markets across the country, proving that new supply data should not be viewed in a vacuum.

Author: John Plasencia , Managing Director