Why Hotel Owners Should Welcome New Competition Even When It Hurts

For the hospitality industry, the delivery of new supply is considered one of the biggest threats to established hotels. 

But while increased competition in a market is detrimental in the short term, it can actually benefit older product in the long run if handled smartly.

Unlike other sectors, hoteliers are not guaranteed a steady inflow of cash from long-term leases since their tenants come and go daily. As such, new supply is considered extremely disruptive — which explains the industry’s abhorrence to the rise of Airbnb, which it considers new supply.

The initial impact of increased competition is detrimental, as new supply will almost always affect existing hotel occupancy, eating into RevPAR (revenue per available room) and eventually offset average daily rates (ADR). But when taking the longer-term picture into consideration, new supply can boost demand from tourists and spur economic growth, which will positively impact all hotels in that market, according to Bryan Younge, Colliers International's Hospitality & Leisure and Valuation Advisory Services practice leader.

"Just because you see a lot of new supply in a market doesn’t mean the long-term value of a hotel is going down," Younge said. "In fact, strong new supply additions can be a signal of the long-term prosperity of a market and could even enhance returns and prolong properties' economic life."

It All Comes Full Circle

Younge said the opening of a new hotel often initially keeps other hoteliers from being able to increase room rates.

“[Maintaining flat rates] is a defense maneuver to counter the impact of new supply in the market to some degree,” Younge said.

It can take established hotels months, sometimes even years, to recover as new supply is absorbed, Younge said.  But hotels that are surrounded by smart new supply additions have greater propensity to fully recover, and often end up stronger than ever.

Take New York, Nashville and Miami, for example. Strong economic factors such as dense populations, healthy job growth and a strong potential for tourism revenue drew developers to those markets from 2012 through 2016.

The new hotels spurred more business and leisure travel in those cities and stimulated economic growth by adding accommodations for future tourist spots such as new stadium development or major conferences. New supply also creates jobs, from construction labor to service-oriented workers needed to run the hotels.

There are a few markets where hotel supply is projected to negatively impact occupancy rates this year — namely Philadelphia, Minneapolis and Orlando, according to CBRE’s Market outlook. But Younge said though many fear the consequences of an overbuilt market, new hotels make cities a more economically viable venue, contributing to positive economic growth in the long term.

“Without [new] hotel rooms in markets it would inhibit a city’s ability to enjoy the upside brought on by all this economic development,” Younge said. “If a city didn’t have the capacity to add new rooms to its market, then there would be very limited upside in positive economic impact ... it would be a strain in the life cycle of an urban area.”