Will the lodging industry’s supply growth outpace demand growth?

By Linchi Kwok - Associate Professor at The Collins College of Hospitality Management

22 April 2021
  • Will the lodging industry’s supply growth outpace demand growth?Will the lodging industry’s supply growth outpace demand growth? — Hotelier Magazine

Kwok

The COVID-19 vaccination rate is climbing steadily in the U.S. At its current rate, three in four people, or 75% of eligible residents, will be vaccinated by June. Businesses are reopening. The U.S. economy is now operating at 88% of its pre-pandemic level, with hope for continuous improvement.

People want to travel again. In mid-March, Disneyland announced it would reopen on April 30. Now, all reopening day reservations for both single-park and park-hopper tickets are sold out already.

On April 2, the Friday before Easter, TSA screened over 1.58 million people at airport checkpoints, the highest number since March 12, 2020. By comparison, TSA only screened 129,763 people (about 8.2% of 1.58 million) on April 2, 2020.

The U.S. lodging industry reported the best weekly performance since March 2020

According to STR, a world-leading provider for data benchmarking, analytics, and marketplace insights for hotels, the U.S. lodging industry reported the highest demand and occupancy levels since the pandemic for the week ending April 10:

  • Occupancy at 59.7%, about two percentage point increase from the previous week
  • Average Daily Rate (ADR) at $112.22
  • Revenue per Available Room (RevPAR) at $66.99

Over 50% of the hotels posted an occupancy above 60% for the week. Tampa and Miami, two of the U.S. top 25 lodging markets, reported an occupancy of 83.7% and 74.1%, respectively.

The demand for the week ending April 10 reached 3.2 million room/nights per day, about three times more than a year ago. Only 37 out of the 166 U.S. markets did not report a week-to-week increase for that week. Furthermore, 46% of all hotels were in the "recovery" or "peak" categories when using STR's matrix to measure market recovery (i.e., an RevPAR index against the market's comparable week in 2019).

Airbnb and Vrbo are actively recruiting more hosts to meet the surging demand for short-term residential rentals

The home-sharing and extended-stay sectors are more resilient to the pandemic. Airbnb booking resumed to a pre-pandemic level in June 2020. Even hotels' home-sharing arms have been doing well. Likewise, the economy extended-stay hotel segment reported a 75.4% occupancy rate during the time when the U.S. lodging market was running at 42.2% occupancy.

Airbnb's CEO, Brian Chesky, told CNBC on April 16 that Airbnb had 4 million hosts now but would need millions more to meet the surging demand. Meanwhile, Expedia's Vrbo wants Airbnb's "superhosts" by poaching them with incentives.

The U.S. opened the largest number of new hotels and rooms in Q1 2021

The U.S. opened 220 properties or 26,057 rooms in the first quarter of 2021. The U.S. led both China (12,418 rooms) and Japan (2,499 rooms), the second- and third-ranking countries, with the highest number of new openings by a significant margin. Additionally, 186,269 rooms are under construction, with 214,287 rooms in final planning and another 237,703 rooms in planning.

To some extent, new hotel construction in the U.S. has already slowed down. The current number of rooms in construction is down 34,000 from its all-time peak at 220,207 rooms in April 2020. Moreover, more hotel projects changed to "abandoned" or "deferred" in the last 12 months.

While we are feeling optimistic about the future of the lodging market, businesses in the hospitality and travel industry are not expected to see a full recovery until 2023 or beyond. A full recovery will not take place until groups and business travelers come back to hotels. Thus, adding supply could be concerning, although construction activities have been moderated.

Companies are now selling real estate at the fastest pace, some of which may add to the hotel supply

In the global real estate market, companies are now selling their assets at the fastest pace. One-third of those sales were office properties, probably because more companies let employees work from home permanently.

Although it is uncertain how long the work-from-home "bleisure" trend will stay after the pandemic, the lodging industry is finding ways to embrace such changes. Strategic hoteliers may also take the opportunity to grow their portfolios through mergers and acquisitions. Another strategy to grow is to convert delinquent or distressed office buildings into hotels.

Other buyers may want to turn the office buildings into apartments, restaurants, or other commercial spaces for sales or leasing. Back in 2018, Airbnb had begun investing in the real estate market, building Airbnb branded apartment projects in cities across the U.S. Will Airbnb and Vrbo get into the game of converting office buildings into rental units to meet the surging demand for home-sharing facilities too?

It is likely that a number of office buildings will be converted into hotels or apartments. Hence, the supply of lodging facilities will go up accordingly.

In summary, the lodging industry is expected to see both supply and demand growth. Still, we must pay attention to a few critical questions:

  • Will the lodging industry's demand growth sustain supply growth?
  • What type of lodging products should be considered when planning a new project?
  • What will be the best use of real estate assets?

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The Collins College of Hospitality Management | Cal Poly Pomona

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Pomona, CA 91768-2557
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Phone: +1 (909) 869-2275
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Linchi Kwok

Linchi Kwok publishes viewpoints and refereed articles in hospitality management and service marketing. His research work won several best paper awards at academic conferences. Linchi is now an associate professor at The Collins College of Hospitality Management at Cal Poly Pomona and a visiting professor at Sun Yat-Sen University. Before moving to Southern California, Linchi worked at Syracuse University, Rochester Institute of Technology, Texas Tech University, and Marriott.