July 2017 Compass – Hotel Market

Hotels’ Record Performance Continues as Market Cycle Peaks;Slower Growth, ‘Soft Landing’ Projected

The Twin Cities hotel market continued experiencing record performance, boasting more than seven years of consistent, year-over-year growth driven by a strong mix of leisure and business demand and a healthy local economy. However, the market is at the top of the cycle looking down. Occupancy declined slightly due to new supply delivered. Year-to-date average daily rates (ADR) continued climbing, although at a slower pace, driving slightly lower RevPAR (revenue per available room) growth than in years past.

Demand and occupancy growth are leveling off and beginning to slow, just as the pace of new supply growth accelerates. While 2017 and 2018 are expected to continue to see solid industry fundamentals, performance may appear lackluster compared to the unprecedented hotel market run we’ve experienced since 2010. This segment of the cycle is best described as a “soft landing.”

For the first time in seven years, the market is beginning to see pockets and submarkets where new supply is starting to outpace demand. Most investors and developers are viewing performance in the market relative to the amount of new supply with cautious optimism. Still, unmet demand remains for prime sites and well-located, value-add hotel opportunities.


The development boom in this cycle has continued with approximately 3,400 rooms completed market-wide and another 5,000 rooms planned or underway. While some developers continue to seek sites in prime submarkets, others are tapping the brakes due to concerns of overbuilding and rising construction costs. The market is likely nearing its cyclical peak for development, and a deceleration is anticipated.

Following a six-year “dry spell” in which no new rooms were delivered in downtown Minneapolis, 1,402 rooms have opened since 2015 and another 1,000 are proposed or under construction. East Town and U.S. Bank Stadium’s upcoming events are fueling demand, including the Super Bowl in 2018, ESPN’s X Games in 2017 and 2018, and the NCAA Men’s Final Four in 2019. The Bloomington/Mall of America/Airport submarket remains a hotbed for development with 1,618 rooms delivered since 2013 and another 1,011 rooms proposed or underway.

It remains a seller’s market and values have likely peaked. Some investors are less willing to pay premium prices and they are being more selective. Although a dip in sales occurred, hotels are still trading and many investor groups continue to aggressively seek quality assets in prime submarkets. Most deals are by private individuals and institutions/private equity funds. Select-service hotels are in highest demand due to the profitability and efficiency of these no-frills brands.

Mid-scale and upscale select-service is the hottest sector for developers, which continue to scout prime sites. Select-service properties are less expensive to develop and maintain, and consumer demand for these properties continues to be strong. Developers are also focusing on millennial travelers. The Moxy Uptown, for example, will be Uptown’s first hotel. It is Marriott’s new select-service brand targeting tech-savvy Millennial and contemporary travelers. Other brands include AC Hotel, Radisson Red and Hilton’s True.

Airbnb continues to grow, posing a threat to conventional hotels. While it is difficult to measure its impact on hotel performance, it is safe to say that some segment of Airbnb users are bypassing hotels and average rates in some markets are being negatively impacted. While Airbnb has primarily targeted leisure travelers in major metro areas, use by business travelers is expected to grow.

Although the market has reached its cyclical peak and a slowdown is beginning to occur, all eyes are on the 2018 Super Bowl and other upcoming national events. The impact will be widespread with visitors staying in hotels across the metro. The influx of new rooms is expected to create a plateau in occupancy and modest growth in average rates. RevPAR is also projected to soften. The market should be nearing the peak of the development cycle and a deceleration is expected. The market will need time to absorb new product. Investors are still aggressively pursuing assets in prime markets.