Sweet Dreams? The Manchester Hotel Sector At A Turning Point

The latest data on the Manchester hotel sector shows both revenue per room and occupancy rates sliding, just a little, for the first time after five years of steady growth.

Is this a turning point in the city's hotel sector? Will all the 6,000 city centre beds now in the hotel development pipeline get built or — as some experts predict — will some marginal hotel sites be abandoned, or lost to office or residential use?

Manchester's hotel development sector checked into boom-time activity levels in 2013 and it hasn't checked out yet.

This growth is underpinned by an increasingly busy weekday business customer base and a thriving weekend tourist economy.

Greater Manchester hotel occupancy levels rose from 2016 to 2017, despite the Arena bombing, matching the previous record levels of 80% set in 2015, according to data supplied by STR released by Marketing Manchester.

Even so, there are signs of change. For the first time in five years the Manchester hotel sector is showing signs of (whisper the words) not actually growing. Marketing Manchester/STR data for the first half of 2018 showed a 1% slide in occupancy, and £1 off revenue per room, after a strong June 2018 rebound.

Data from other, fractionally earlier, sources show a more dramatic shift. Occupany rates fell 2.8% in May, according to Hotstats, which said revenue per room slipped back by 4.8% to £80.71. Combine this slide in revenue with rising costs and Manchester hotels suffered an acute drop in profitability, down 12.7% in May, taking profit per room to £44.56.

This cannot be blamed on nationwide trends — Leeds, for instance, was sharply up — and you need only share a few words with Manchester's hotel general managers to understand this is not a statistical blip.

"The market has maybe plateaued," Jencis Director Jeremy Collins said. "But the city has had to take on board a lot of new stock, and Manchester's had a very good run for the last four or five years. This isn't negative, it's a pause. Given that Manchester's economy is still growing and diversifying, on a good day I'd say the hotel sector looked rosey, and on a bad day I'd say it was stable."

Some Hotels Will Never Get Built

So nothing very much changes, and the Manchester hotel sector rolls onwards? Not quite.

A large wave of new hotel development is about to hit the city. Visit Manchester say that at the close of 2017 there were more than 9,350 rooms in Manchester city centre and by the end of 2018 this room count is expected to reach 10,540 rooms.

In Manchester city centre 3,915 rooms are due to be added that would increase the current supply by 42%. That means 1,053 more rooms in 2018. For longer range supply you can find a helpful and thorough map of the development pipeline here.

Of the roughly 10,540 rooms in the city centre, nearly 7,000 are in the 3-4 star category, and it is this central rump that might be vulnerable, analysts said.

"It's the mid-market — you would call it 3-star these days — that is feeling the pressure because if people are going to stay overnight they either want good budget space, or the boutique hotels that offer something different," Lambert Smith Hampton Hotels Director Hugh Anderson said.

"Corporate mid-range is the vulnerable sector, although even here they can trade well in some locations."

Anderson is not alarmed by what he calls a "slight pegging back" of hotel room rates and occupancy, saying it is a necessary adjustment to new beds coming into the market. But he does think it might give some developers genuine pause for thought.

"Whether all of the new hotels planned get delivered is another question, particularly the hotels included in big mixed-use regenerations which are not yet formally in the market place," he said. "Anybody developing would look long and hard, and ask themselves whether it is the right location, the right opportunity, the right thing to do with the site. We may find alternative uses instead of hotels, if only because lenders and funders look on the sector with more caution."

This diagnosis is widely shared: "Some of the hotels in the mixed-use residential-led schemes are just not going to happen," Jencis' Collins said. "Perhaps they put them in to help the planning process along, but clearly the locations will never work. Those plots will become residential again."

Older Hotel Sites Will Drop Out Of The Market

At the same time as some hotel plans evaporate under pressure from hotel economics — and competing, higher capital values — so another swathe of Manchester hotel property could simply drop out of the market altogether.

Nicole Roe, who is an associate in design and planning consultancy Barton Willmore's Manchester office, is among those advising Premier Inn. She agreed that the market has polarised between good budget and boutique town houses.

“There’s a lot of competition in that £100 a night range," she said. "I’m not sure we’re overprovided, but there is a lot of activity in that Piccadilly/London Road/Portland Street corridor, which has become the key axis for hotel development and given its connections to shopping, offices and the universities, one can completely understand why.”

The pressure of new entrants will force older or poorly located hotels off the map, she said. “We may find residential replaces outdated or poorly located hotels. Of course we’ve seen this kind of movement before — in the recession, hotels moved into previously office locations, like the MacDonald hotel in a former BT office block, and we’ll see it swing another way now, as some hotels swing back again.”

“Operators faced with the need to invest in some hotels may simply feel it is better to start again somewhere else, and everyone can think of hotels in city fringe locations that today don’t make sense. They would be better used for offices or, in some cases, residential.”

Not everyone agrees. Studying lists of what might get developed in Manchester, which he says runs into tens of thousands of rooms, Colliers International's head of U.K. hotels, Julian Troup, said he expected a winnowing.

"Whilst I entirely agree there are plenty of schemes in the hotel development pipeline that won't happen — tons won't happen, maybe only 15-20% will happen — I don't think we'll see many existing hotels drop off the map. They are owned or run by people whose business is hotels, only hotels, and their best option is to up their game at those sites," Troup said.

A Softer Market, But By No Means A Bad Market

If Troup is right and barely a quarter of planned hotels ever make it to openning day, then the city's hotel sector will soon recover a Ritzy feel.

In the meantime new investment from international operators shows they regard Manchester as a good long-term bet.

Earlier this summer Property Alliance Group secured full planning consent for a new 17-storey hotel at 55 Portland St. Planners (unusually) approved the loss of office space for a hotel development which will see a 4-star, 329-bed hotel operated by Dalata Hotel Group under its Clayton Hotel brand and include a ground-floor bar with restaurant at mezzanine level as well as a business centre with meeting rooms. Construction is expected to start in November and be complete by 2021.

Meanwhile Japanese hotelier Tokyo Inn has confirmed that it has chosen Manchester's former Barclays Bank, Piccadilly, for its U.K. debut.

The hospitality group, which already has two hotels on the European mainland, plans a 22-storey tower on the site at 12-16 Piccadilly. The site incorporates the Grade II listed bank building.

"The arrival of these operators is a significant sign," Colliers' Troup said. "Until this year Manchester has seen visitor demand strong enough to absorb all the new stock without damaging room rates. But demand is no longer growing as fast as supply, and we should expect a few softer years as the market adjusts."

"But operators like Manchester. They want to come," Troup insisted. And so long as that is the case, the fundamentals of the Manchester hotel sector will not be changing.