Hotel Supply Fundamentals Provide a Roadmap for future Construction
By John B. Corgel, Jamie Lane, and Ryan Speed
Comparing Pipeline and Modeled Supply
'Pipeline supply' is defined here as the projects included in the STR pipeline data base that are currently under construction and scheduled to be completed in the next six quarters. The 'modeled supply' is the output from Hotel Horizons® supply models when allowed to run naturally, that is, supply comes solely from the influences of variables in the model.
The normative modeling effort indicates what supply should be in the market given the historic, current, and future economic and market-specific conditions affecting hotel construction. We compare these numbers side-by-side to the supply forecast from the pipeline data. The modeled supply (MS) is subtracted from the pipeline supply (PS) and assess both the sign, either positive or negative, and the magnitude of the difference and (i.e., PS – MS = +/- Difference). Analyzing this difference not only gives us insight to where the market resides in the cycle, but it also helps identify markets that may be in danger of overbuilding and the possibility of occupancy decreases. The following definitions apply:
- If Difference is negative then that market is undersupplied through 2015 and prime for additional construction.
- If Difference is positive then that market is overbuilt through 2015 and caution should be followed when contemplating additional construction.
By Chain Scale
When analyzing the hotel industry, branded hotels are grouped by ADRs into six chain scale segments. These chain scale segments are Luxury, Upper Upscale, Upscale, Upper Midscale, Midscale, and Economy. We run the econometric supply models on each of these chain scales and then calculate the number of room additions to each chain scale as of the end of 2015. After compiling the number of modeled rooms, we compared it to the number of room scheduled to open by 2015 that are currently in the pipeline and classified as either under construction or in final planning. The number of new rooms entering the market by the end of 2015 for both the modeled supply and pipeline supply for each of the chain scales is shown, side by side, below in the following exhibit.
To compare the model and the pipeline, we take the results from the two charts above and subtract the 2015 pipeline supply from the 2015 modeled supply for each of the chain scales. What resulted is what we labeled the total chain scale supply gap, which is shown for each chain scale in the following exhibit.
Since the chain scale supply gap is equal to the number of rooms in the supply pipeline minus the forecast supply from our models, positive number means the segment is ahead of what the model shows should be in the market and negative numbers mean that what is in the pipeline supply is less than what should be according to our models. Out of these six chain scale categories, Upper Upscale, Upscale, Midscale and Economy show negative supply gaps. On average for each of these chain scales, the supply level is not reaching what the supply model indicates. Upper Midscale shows a positive gap and Luxury is about at supply equilibrium.
Next we analyzed the 50 Hotel Horizons® markets by comparing the pipeline supply to the supply growth rate from the forecast models in the same way as was done with the chain scale categories. The results of this analysis are contained in the 2014 edition of PKF-HR's Trends® in the Hotel Industry report.
The full article, along with a list of the 50 under- and oversupplied markets, is contained in the 2014 edition of PKF-HR's Trends® in the Hotel Industry report. To purchase a copy of the 2014 Trends® report, and the full version of the analysis, please click here
About CBRE Hotels
CBRE Hotels is a specialized advisory group within CBRE providing brokerage, valuation, consulting, research and capital markets services to companies in the hotel sector. CBRE Hotels is comprised of over 375 dedicated hospitality professionals located in 60 offices across the globe.
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