The evolution of American hotel supply since the year 2000
Every industry experiences change, growth and evolution over time, and the tourism and hospitality sectors are no exception. With this in mind, we take a closer look at how American hotel supply has developed over time—not just by number of new properties and rooms but through the evolution of the different hotel ownership models.
American hotel supply (2000-19)—room for growth, literally
Close to 10,000 additional properties have entered the U.S. hotel industry over this nearly 20-year period, resulting in an inventory increase in excess of 1.1 million rooms. Digging a little deeper, 2008 and 2009 produced the largest year-over-year new supply increases of 3.0% and 2.6%, respectively, before five years of sub-1% growth. If those five years were a little underwhelming, the following five since 2015 (including June YTD 2019) welcomed increases exceeding 1%, with incremental yearly lifts that included a 2.3% jump in new rooms during the opening half of 2019. That gain in new supply for the first half of this year was highest for that period since 2009.
The elephant in the hotel room, and the question you’re probably asking yourself, is which types of hotels have entered the market during this 19-year period? Has the relationship between franchise, chain-managed and independent properties also evolved? And, if so, to which extent?
Franchise openings in the U.S.
Franchise properties have accounted for the largest proportion of new rooms added in the U.S. each year since 2000. To add context, the below image compares the U.S to Europe in terms of the proportion of new rooms added by ownership. While franchise openings account for 72% in the U.S., there is a much more even split in Europe, where franchised properties have actually accounted for the lowest proportion of new inventory.
Franchising growth in the U.S. could be an indication toward preference of the asset-light model. Principally this model represents low costs for parent companies, enabling quick expansion and revenue growth while the management company assumes responsibility—but revenue is built quite quickly.
To understand the trends seen in the U.S., we looked at when the “franch-highs” and lows have been evident over the past 19 years?
In 2000, almost 93,000 franchised rooms opened in the country, accounting for 67.4% of all new rooms. That franchise percentage fell below 60% in 2003 (58.3%), the only time that has happened in the last 19 years, before years of consistent growth that peaked at just under 80% in 2007—the highest proportion for any full year in this period. Other than a slight blip in 2011, when franchised rooms accounted for 69.8% of all new room inventory compared to 79.6% in the previous year, this proportion has remained above 70% each year since.
The wider economic landscape is likely to have played a part in the 2003 and 2011 dips, with a recession in 2001, the 11 September terror attacks in 2001 and the global financial crisis in 2008 having respective effects on market confidence. Because pipeline projects already started are typically completed, we usually have to wait 2-3 years after a significant event before the effects of diminished investor confidence can be seen. For example, supply growth post-2009 was slower than the U.S. average as investor confidence in real estate also needed time to recover. When RevPAR levels began to increase, that led to slightly less muted inventory growth.
However, market-level analysis highlights that not all is as seems. New York has welcomed the most new rooms since 2000, yet franchised openings account for 45% of new rooms and are outweighed by independents at 47%. Houston sits second in number of openings since 2000, and alongside New York and Dallas, has been one of the largest markets in terms of franchised openings. In 2018, franchised openings accounted for 78% of Houston’s new room inventory.
Las Vegas is the largest U.S. market for independent room openings, accounting for 66.5% of all new rooms since 2000. This comes with the caveat that the majority of this growth happened between 2000 and 2008, followed by multiple years without the addition of new rooms.
Who’s top of the class for American hotel supply?
Close to 140,000 rooms opened in 2000, with 83% in the Economy to Upscale classes. Upper Midscale (32%) owned the largest share. By 2008, the figure for new inventory rose to 153,000, a peak for the past 20 years. Only 78% of these openings were in the Economy to Upscale classes, highlighting the growth of the Luxury and Upper Upscale classes during this economic boom.
Room openings fell to just under 117,000 in 2018, with the proportion of Economy to Upscale sitting at 79%. Interestingly, the year produced a smaller proportion of Economy openings when compared with 2000 and 2008.
On a class-level, the majority of franchise openings are seen in the Upper Midscale and Upscale classes. In 2018, these two classes accounted for 77% of new rooms across all six classes—an increase on the 62% reported in 2000. The figure peaked in 2016, reaching 85% of all new franchised inventory.
These two classes are popular because they represent a good value proposition for the majority of travelers.
Using STR’s AM:PM platform, there are currently 450,203 rooms across 3,935 projects in the pipeline with projected opening dates between September 2019 and September 2021.
Although the focus of this article is operation and class, analyzing hotel scale offers the greatest insights into the composition of projected new inventory. Of all scheduled openings, 70% fall into Economy through Upscale (including Upper Midscale and Midscale), of which the majority are franchises. Conversely, less than 10% of these properties are unaffiliated.
Another interesting point is that of all active pipeline rooms, over 80% are branded by the “Big 6” parent companies (Choice, Hilton, Hyatt, IHG, Marriott and Wyndham).