These hot spots outside of the Top Five should be on every investor’s radar.
By Alicia Hoisington
The United States hotel industry has seen supply numbers creep up in recent years. In October, the U.S. saw 4,561 hotels with 554,226 rooms under contract in the pipeline, a year-over-year increase of 21.8 percent in room count, according to STR. But with so much supply coming online, some hoteliers might wonder what markets are safe to place their bets.
“Although there will always be investor demand for the major markets, there is significant supply that needs to be considered,” says Teague Hunter, president of Hunter Hotel Advisors, citing such markets as New York City and Miami. “There are opportunities outside of the top five that should be on an investor’s radar.”
The West Coast is still popular and always will be, he says. “It’s partially because it’s hard to develop there, so if you like headaches and want some barriers to entry, the West Coast continues to be a solid market, all up and down from Washington to Oregon, Northern California and Southern California.”
Hawaii and Key West have been popular for development, he says, but those markets are expensive due to high barriers to entry. “Institutional investors are able to find high RevPAR deals they are looking for,” Hunter adds.
Suzanne R. Mellen, senior managing director and practice leader in San Francisco for HVS, says many of the major U.S. markets will always be hot for development due to their strong economies and diverse demand drivers.
She says when searching to invest in a hot market, developers should look to the tech industry.
“That’s the real driver of a lot of the strength that we’ve been seeing in the U.S. economy, especially as energy markets have waned,” she says.
But beyond tech and coasts, there are several other industries and drivers pushing demand in hot markets. Besides the usual suspects, following are some of the markets Hunter and Mellen identify for developers to keep an eye on.
Charleston, South Carolina
Mellen says that Charleston is a popular hub of the southeastern United States, within a few hours’ drive of many major markets.
“Downtown it’s been pretty limited commercial demand, so it’s primarily group and leisure demand that’s been driving that market,” she says. “It’s just a very popular place, just like Savannah [Georgia].”
She says the market is a good drive-in and short fly-in market, which helps to spur demand. Additionally, the Tanger Outlet retail center has helped to fuel demand in the market. Downtown Charleston also is home to a strong medical community and many pharmaceutical sales representatives.
Charleston has seen demand growth (+2.1 percent) outpace supply growth (+1.3 percent) as of year-to-date October, according to hotel data company STR. All three key performance metrics have seen growth over the same period. Occupancy was up 0.8 percent to 76.3 percent. Average daily rate grew 3.3 percent to $139.03, while revenue per available room increased 4.2 percent to $106.09.
As of October, the market had 41 hotels with 4,501 rooms under contract in the pipeline, according to STR.
“We like Dallas a lot right now. Dallas has got a lot of growth, and a lot of positive things are happening in Dallas,” Hunter says.
Dallas is a large market with a good mix of demand drivers, he says. “Unlike some parts of Texas, Dallas is not dependent on the energy market.”
Hunter cites several things driving demand in the market: the market center; a growing design district; a convention center district; a medical district; sports teams; universities; and an arts district.
“All of these are little pockets that are all adding to it,” he says.
Dallas Love Field, a city-owned airport about six miles from downtown, also is driving demand in the market, Hunter says. Additionally, Dallas Mavericks owner Mark Cuban announced plans in October for a $70-million training facility in the Dallas Design District.
Mellen agrees that Dallas is a booming market; however, she says most of that heat isn’t happening downtown, but rather north.
She cites major companies moving their headquarters to the area. For example, Toyota is moving from Torrance, California, to Plano, which is about 20 miles northeast of Dallas. The move is expected to bring about 4,000 California transplants to the area, according to media outlets, and expected to be completed mid-2017. Additionally, Fidelity Investments will more than double the size of its office in that same $3-billion Legacy West development in Plano.
The Dallas market has seen demand growth (+3.8 percent) outpace supply growth (+2 percent) year-to-date October, according to STR data. Over the same time period, occupancy is up 1.7 percent to 73.4 percent; ADR is up 4.6 percent to $104.33; and RevPAR is up 6.5 percent to $76.54.
Dallas has 128 hotels with 16,389 rooms in its pipeline as of October, according to STR. Of those, 52 hotels with 6,501 rooms are under construction.
“Denver is not a secret anymore,” Hunter says. “But Denver, and all of Colorado, Colorado Springs and markets like that are great. There has been significant migration to Colorado over the past few years.”
The Denver market has 65 hotels with 9,012 rooms under contract in the pipeline, according to STR. Twenty-three hotels with 4,368 rooms are under construction as of October 2016.
Mellen says that part of Denver’s appeal is thanks to a revitalized downtown that attracts visitors. In 2015, Denver hosted 16.4 million overnight visitors who spent a record-breaking $5 billion, according to convention and visitors bureau Visit Denver. With projections to hit 50 million visitors who will spend $9 billion by 2025, the CVB recently introduced a 10-year plan for tourism marketing. Plans to expand the city’s convention business, enhance connectivity between neighborhoods and improve downtown experiences are part of the plan.
Denver has a diverse mix of demand drivers, including: government; banking; telecommunications; high-tech; and health care, according to HVS. The city’s increasing infrastructure plays a big part in higher RevPARs for the market, too. For example, Denver International Airport added new gates and a terminal-adjacent Westin hotel. New light-rail lines connect the airport and other centers of business with the downtown area and the Denver Tech Center. Connectivity between submarkets has led to greater hotel options relative to demand generators, according to HVS.
RevPAR in Denver year-to-date October increased 3.3 percent to $99.45, according to STR. ADR was up 5.9 percent to $129.48. Occupancy, meanwhile, was down 2.5 percent to 76.8 percent. Supply growth (+3.9 percent) has outperformed demand growth (+1.3 percent).
If Mellen had to bet on one market in the U.S., she says it would be San Francisco – and that’s not just because she is based there.
“San Francisco is the most supply constrained but has the best economy,” she says. “The strongest markets are the ones that are supply constrained but have incredible growth.”
According to STR, the San Francisco/San Mateo market has 41 hotels with 5,959 rooms under contract in its pipeline. The market has 396 hotels with 51,708 rooms open as of October 2016.
Although Mellen admits labor issues affect San Francisco and it can be tough to build in the city, she cites some reasons for success:
- The convention center is expanding, which will increase the center’s space by more than 40 percent. The work should be completed by the end of 2018.
- The tech industry has implanted itself in the heart of the city. For example, Mellen cites the Salesforce Tower, which will be the tallest building in San Francisco. The work on the soon-to-be 1,070-foot-tall tower will be completed in 2017.
“Tech is the driver of the world economy,” Mellen says. “[San Francisco] is the epicenter of tech, and we’re supply constrained. You put that all together, and you have a favorable supply and demand situation.”
When looking at the data, supply and demand growth have almost been on par with each other as of year-to-date October. Supply grew 0.8 percent, while demand increased 0.7 percent, according to STR figures. Key performance metrics look relatively healthy over the same time period, with RevPAR up 4.3 percent to $203.91 and ADR up 4.4 percent to $237.62. Occupancy remained nearly flat (-0.1 percent to 85.8 percent).
“I’m a big fan of markets like Louisville,” Hunter says. “They’ve got a bourbon trail going. They’ve got Fourth Street Live, so some nice entertainment districts for great leisure travel offerings, but also a solid corporate base including UPS and Yum brands, for example.”
Hunter also cites the market’s Kentucky International Convention Center as a solid demand driver in the market.
Demand growth in Louisville is outperforming supply growth year-to-date October, according to STR. The market saw a 3.2-percent spike in demand growth, while supply grew 2.7 percent. Occupancy is nearing the 70s, clocking it at 67.4 percent year-to-date October, a 0.5-percent increase year over year. Meanwhile, ADR is up 3.7 percent to $109.62 and RevPAR is up 4.3 percent to $73.89 over the same time period.
“They have a bunch of product and supply coming, but everywhere does,” Hunter says. According to STR, the market has 21 hotels with 2,767 rooms in its pipeline. Four hotels with 396 rooms are under construction as of October.
Pacific Northwest: Seattle and Portland
When asked what market he would bet on, Hunter says he’d stick to the Pacific Northwest. He’s a fan of Seattle and Portland.
“It’s a combination of population growth and barriers to entry and opportunity,” he says. “I’d love to pick a Nashville, but everyone’s going there. That’s not earth shattering.”
Mellen agrees that Seattle and Portland are strong contenders with solid performance.
Although down 0.8 percent year-to-date October, occupancy in Seattle sat at 78 percent, according to STR. ADR was up 3.5 percent to $157.39, and RevPAR increased 2.7 percent to $122.78. Supply grew 2.5 percent, while demand increased 1.7 percent.
Portland, Oregon, saw growth in all three performance metrics year-to-date October, according to STR data. Occupancy was up 1.1 percent to 77.8 percent; ADR rose 5.3 percent to $135.16; and RevPAR was up 6.4 percent to $105.19. Demand growth (+2.3 percent) outpaced supply growth (+1.2 percent) in the market.
Jacksonville: Up and coming?
One market Hunter says developers might want to keep their eye on is Jacksonville, Florida.
“It’s got Florida. It’s got a port, and it has little supply growth, little attention to it right now,” he says. “Those are the type of sleeper markets that we like.”
Jacksonville has 20 hotels with 1,944 rooms under contract in the pipeline, according to STR. Of those, six projects with 667 rooms are under construction. The market has 268 hotels with 27,379 rooms open as of October 2016.
The supply and demand growth trend looks favorable when looking at STR figures. Year-to-date October 2016, supply has grown 0.7 percent while demand grew 4 percent. As such, RevPAR has enjoyed a 7.9-percent increase to $75.67; ADR grew 4.4 percent to $105.33; and occupancy was up 3.3 percent to 71.8 percent.
New supply for Jacksonville in 2015 was absorbed quickly, according to HVS. However, the consultancy does anticipate new supply to outpace demand growth going forward. With the anticipated entrance of new supply and significant renovations to several properties in the area, HVS expects ADR will continue to grow, allowing for a positive RevPAR trend moving forward. ■