January 2018 Compass – Hotel Market
Twin Cities’ Hot Hotel Market Cools; Slower Growth Projected As Market Adjusts to New Supply
After boasting robust growth in occupancy and average daily rates (ADR) for the past seven years, the hot streak has ended and the Twin Cities hotel market is finally cooling. The long cycle has peaked, as the market simply could not sustain the torrid pace of activity. A slower pace of growth is now expected.
The slowdown can largely be attributed to the surge in new construction as supply growth is finally outpacing demand. The occupancy rate, ADR, and revenue per available room (RevPAR) each dipped. Rates, however, are holding relatively steady despite the drop in occupancy.
DESPITE WEAKENING OCCUPANCY, DEMAND REMAINS STRONG
Fueled by a healthy economy, demand is solid by both business and leisure travelers. With more available rooms, however, it is a bigger pie with increasing competition. Hitting the peak does not mean that the market will decline quickly. Solid performance is projected in 2018-19 with high profile events helping to fill rooms. However, the market will experience slower growth moving forward until it absorbs the new capacity. Many investors and developers remain cautiously optimistic.
DEVELOPMENT REMAINED BRISK; SLOWDOWN PROJECTED
The development boom continued, with approximately 3,900 new rooms delivered market wide so far during this cycle and another 3,000 rooms in various stages of development. Developers continue pursuing prime sites in attractive submarkets. However, some pulled plans due to overbuilding concerns and increasing construction costs. Also, financing may be more difficult to obtain for some projects. Overall, five new hotels totaling 538 rooms opened in 2017, with seven more totaling 754 rooms set to open in the first half of 2018. Downtown Minneapolis: Remains a hotbed for development, with 1,457 rooms delivered since 2015 plus 1,100 rooms proposed or underway. Major Events Driving Demand: 2018 Super Bowl, 2018 ESPN X Games, the 2018 National Baptist Convention, and the 2019 NCAA Men’s Final Four.
• Dual-branded 75-room Tru by Hilton & 125-room Home2 Suites by Hilton (Developer: JR Hospitality and Hawkeye Hotels)
• Element Hotel, 160 rooms (Developer: United Properties for the Lion Hotel Group)
Bloomington/Mall of America/Airport Submarket: The spike in construction continued, with 1,766 rooms delivered since 2013 and more than 1,500 rooms proposed or underway. Projects include:
• Holiday Inn Express, 171 rooms in Bloomington (Developer: JR Hospitality and Hawkeye Hotels)
• InterContinental, 300 rooms at the Minneapolis-St. Paul International Airport (Developer: Graves Hospitality)
Downtown St. Paul Submarket: Also experiencing demand, with approximately 4,500 new rooms underway or proposed. The
Midway United FC Soccer stadium mixed-use development includes 400 planned rooms.
TRANSACTION VOLUME DROPS; BUY-SELL GAP TO BLAME
Although it remains a seller’s market, values have likely peaked and investors are more cautious and selective. Properties are still trading, but there is a widening buy-sell gap that has slowed transaction activity as buyers negotiate to push prices down. That being said, investors are still pursuing prime properties in attractive submarkets.
• KHP Capital Partners purchased The Hotel Minneapolis from Chesapeake Lodging Trust for $44 million.
• First Hospitality Group acquired the Hilton Garden Inn Minneapolis Airport from Colony NorthStar for $33 million.
• Howell Motel Development sold the Holiday Inn Express & Suites Shakopee to SBM Hospitality for $10.3 million.
SELECT-SERVICE BOOM CONTINUES WITH FRESH FRANCHISES
Developers continue building fewer-frills, select-service and extended-stay hotels, which are efficient and profitable. Many are focusing on the tech savvy Millennial and “modern-day” travelers. Examples include the Moxy Uptown – Uptown’s first hotel, Radisson Red, Hilton’s Tru and AC Hotels by Marriott. As competition accelerates, hoteliers are differentiating their properties to draw this next generation of travelers.
Another growing trend is dual-brand hotels where operators double up offerings at one property. An example is Tru by Hilton and Home2Suites by Hilton.
THE IMPACT OF AIRBNB
While the effect of Airbnb on traditional hotels is sometimes difficult to quantify, the sharing economy is diverting some demand away from traditional hotels. Airbnb typically has more of an impact in major leisure travel markets and for event-driven stays like the Super Bowl. Meanwhile, more cities are attempting to regulate Airbnb and similar platforms.
Solid performance is anticipated in ‘18 and ‘19 with global and national events driving business. The 2018 Super Bowl will put Minneapolis in the international spotlight and fill thousands of rooms. The end of the long cycle was inevitable, however. The question is how long it will take the market to absorb the new product. The market is not overbuilt but needs an adjustment period – or a “reset” – for demand to catch up with new supply. Occupancy will fall quicker than rates because more product is coming online. Some discounting of rates will occur, however, due to new competition. Development will slow amid overbuilding concerns and rising construction costs. Investors will continue seeking prime assets in key submarkets.