Commercial Investment Real Estate September/October 2019 | Page 34

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September | October 2019
if there’s increased travel to the area. But future growth
in these areas, he says, can be difficult to predict because
visitor demand can be subject to changes in both the overall
and local economies.
Tourist demand isn’t the only factor in areas with drops
in occupancy rates. Market performance can lag, Cooper
says, in areas where hotels were added in anticipation of a
major event, such as the Super Bowl. Weather and natural
events can also take their toll; while a natural disaster can
bump short-term hotel demand — because of the need
to house storm disaster victims as well as media and res-
cue personnel — occupancy can struggle in the following
year. Houston’s occupancy rate, for example, dropped by
6.4 percent from May 2018 to May 2019, thanks to 2018’s
Hurricane Harvey.
Notable leaders in 2018 were independent and economy
hotels. Independent properties, Cooper says, are appealing
to travelers seeking authentic local experiences and can
capitalize on their knowledge of the market. Economy
hotels are boosted by cost-constrained travelers with few
alternatives, he says, and such hotels face lower competition
from new supply; only about 4 percent of hotel rooms under
construction are economy.
In a similar vein, Mark Woodworth, national practice
leader of CBRE Hotels’ Americas Research, notes that
lifestyle hotels are also becoming increasingly popular.
Such hotels he says, are smaller, “positioned at the 3.5- to
4-star level” and offer upscale design features such as com-
mon areas focused on social gatherings and trendy food and
beverage options. Woodworth also notes one other rising
property type: focused-service hotels that generally offer
smaller guest rooms and a reduced complement of services,
thus requiring fewer employees.
Luxury hotels, on the other hand, experienced a 2.1 year-
over-year RevPAR change as of May, according to Marcus
& Millichap research, but reported occupancy dropped 0.6
percent, in part due to a slowdown in luxury construction,
which represents only 3.2 percent of the current pipeline.
Murphy says she also sees growth in extended stay prop-
erties with a new angle — more tiers are being created
within different brands, so now there are midscale and
upscale options as well. In fact, the overall proliferation of
tiers within brands in general could create some confusion
among travelers. On the other hand, she says, “consumers
are savvy enough now that they’re not just shopping purely
on the brand or the name. They can hop on a website and
see what the room has and what’s on site. I don’t know that
COMMERCIAL INVESTMENT REAL ESTATE
Several factors have contributed to high occupancy rates.
Skyler Cooper, national director of Marcus & Millichap’s
National Hospitality Group, points to the extended period
of U.S. job growth, combined with higher earnings and
consumer confidence — all of which support increased
spending on both leisure and business travel.
Cooper also notes an influx of foreign investment in the
sector. As of May, the proportion of foreign investment in
hotel sales by dollar volume was 12.3 percentage, similar to
the 15.1 percent rate from 2018, based on sales of $2.5 mil-
lion and more. Investors include companies from Canada,
Hong Kong, Germany, and the U.K.; markets with the
highest proportion of foreign investment are New York,
San Diego, and Miami.
Areas with the highest occupancy rates don’t come as
a surprise; Marcus & Millichap’s top five for May, for
example, were New York, San Francisco, Los Angeles, San
Diego, and Orange County, Calif. Leah Dauer Murphy,
executive director and national practice leader for hospi-
tality and gaming at Cushman & Wakefield, adds gate-
way cities such as Miami, Orlando, and Boston to the list.
“They’re always going to have that potential for growth,”
she says. “However, a lot of them also have high barriers
to entry — the availability of where you can develop and
higher costs, and it takes longer to get projects done.”
As a result, she adds, “We’ve been seeing a shift into
secondary and tertiary markets that have lower barriers
to entry, but it’s very crowded in that space. Nashville,
Tenn., and Austin, Texas, have an incredible amount of
new supply; Detroit is getting a good chunk, as are Seattle
and Chicago. A lot of these markets are big group markets,
too, and they want to get those large citywide events to
help offset some of this new development. Some are built
for conventions, and now they’ve got to deliver on that.”
One other trend that Murphy sees is “a lot of markets
that historically didn’t have product to support leisure
demand are now popping up with small hotels. It’s not
a complete ‘build it and they will come’ situation; you’ve
got to have some core demand generators in the market.
But we see them in vacation-oriented seasonal markets,
as well as some suburban markets that may, for example,
get business travelers during the week and then be able to
host larger family groups or amateur sports competitions
on weekends.”
Part of the reason for gains in smaller markets, Cooper
adds, is that there’s generally less construction activity
than in larger markets, and so existing properties benefit