Monitoring the Supply-Demand Equation

Many in the lodging industry are worried that the industry’s ongoing expansion may overwhelm the growth in consumer demand for rooms. This concern certainly is warranted, since supply greater than demand inevitably depresses the average daily rate that hotels can charge and, ultimately, results in a drop in profitability.

March’s annual Hunter Hotel Investment Conference, however, brought reassuring news. In the presentation of its industry outlook for 2016, Smith Travel Research forecast that U.S. supply would increase a manageable 1.7 percent, while demand gains 2.3 percent. Occupancy is expected to remain basically flat. Average daily rate, on the other hand, is forecast to jump 4.4 percent, while revenue per available room – a key industry performance metric – is expected to go up an even healthier 5 percent.

couple with luggage checking into hotel

As it happens, tracking supply growth can be deceptive. Markets vary. Primary markets may be seeing significant supply growth, but secondary and tertiary markets less so. A gateway market like New York City, meanwhile, may be seeing considerable new inventory. But most of that growth is occurring in the emerging sub-markets of Chelsea, Hell’s Kitchen, Long Island City and downtown Brooklyn, which historically have been underserved. Most of those new hotels are midscale, limited-service as opposed to upscale, full-service.

So while it is important to keep tabs on supply growth numbers nationally, the true story on the ground can be more complicated market by market.

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