Why Philly's Hotel Market Is About More Than Just Tourism

Though it may never be one of the biggest hotel markets in the country, Philadelphia's hospitality industry is enjoying quite a moment. That moment will be put into context at Bisnow’s fifth annual Loding and Investment Series in Washington, DC, on Sept. 21.

Although Philadelphia was tabbed by Lonely Planet back in February as the best travel destination in the United States, it takes more than tourism to sustain a hotel market. What really provides the strength is what happens between the weekends and summers that are busy for everyone.

“Philadelphia has really benefited from a growth in our city's convention calendar, more predictable corporate demand, and the increased value of its arts and dining culture," HHM CEO Naveen Kakarla says. He'll be a panelist at BLIS next month. "That combination has resulted in the city having a breakout year in hotel demand.”

In other words, the more reasons large groups and businesses have to visit a city—conventions, trade shows, other businesses’ HQs—the more consistent that city’s hotel revenue will be. Consistency is key, because it allows hoteliers to predict demand, and adjust their pricing to maximize their revenue.

The country’s most competitive hotel markets—Boston, Washington, DC, San Francisco and Los Angeles, according to Naveen—demonstrate that sort of diversity and consistency that makes investing in and purchasing hotels appealing. Naveen specifically notes Boston’s “diverse demand generators and high barriers to entry for building new hotel supply” as strengths for existing hotels.

For investment, that high barrier to entry is crucial, because an influx of too many available rooms into one market depresses revenue in the short term, as new hotels often drop their rates to stabilize their consumer base.

It’s why Philly, which is having an exceptionally strong year thanks in part to the Democratic National Convention, is finding success despite often being characterized as a “thin” market dependent on leisure tourism, Naveen (above) says.

Although the DNC was a massive boon to Philly's hotel industry, it's necessarily a one-time increase that doesn't portend much in the way of long-term trends, according to STR's Jan Freitag.

“It’s hard to estimate the impact going forward, but pulling off such an event can give a city a lot of credibility,” Jan says.

As it stands, Philly's profile is rising in the business world.

“Over this past year, we have seen more and more consistent corporate transient demand and better large-group blocks that are further bolstered by a growing convention center calendar,” Naveen says.

The Lonely Planet ranking certainly helped boost the city’s national profile, but, again, it’s what lies beyond the tourism aspect that truly bodes well for Philadelphia’s hospitality future—the same factors that have driven the city’s boom in multifamily development.

“Beyond the hotel market, Philadelphia has grown from being a city of American history, Rocky and cheesesteaks to become an arts, food and beverage scene,” Naveen says. “The diversity of residential and the growth in value for residential and retail in Philadelphia has really helped raise the brand of the city.”

The coming influx of office buildings with the completion of the FMC Tower and, farther down the line, the Schuylkill Yards project, should continue to solidify Philly’s hotel market by providing more reasons for corporate travel.

However, the concern remains that if too much hotel space is added in anticipation, it could soften the market considerably. In the next year, Philadelphia should see an additional 900 or so hotel rooms added, but Naveen says that amount shouldn’t be cause for concern.

In fact, Philly's growth in supply is a little behind the national trend, which is heading in the wrong direction.

“The flattening of the occupancy growth line is purely a function of the interplay between supply and demand," Jan says. "Demand continues to grow, but since we’re in the later part of the cycle, where the supply is picking up, it’s outpacing the demand.”

The changes to Philly's landscape that makes the city a more appealing destination can be further leveraged by hotels to separate themselves from each other—to create the connection to the neighborhood that has become Airbnb’s big selling point.

“Hotels can emulate [Airbnb’s feel] by having the hippest bar or restaurant on the block," Jan told Bisnow back in June. "It’s about providing some local flair rather than a beige box.”

Beyond just ground-floor retail, other touches can integrate a hotel and its customers with its neighborhood. HHM’s Independent Collection hotels have a perks program, IC Local, which provides members with gifts from a local business in their rooms as an introduction to the neighborhood. Without doing anything else, it makes each hotel seem like a unique experience, rather than the dreaded “beige box.”

That sort of touch may not be just for tourists, but it can also prove competitive in the market that’s seen a softening in international travel revenue.

Foreign travelers are still coming into the country at consistent rates, “but their pricing power and spending are down in certain markets…because our customers' cost of travel has effectively gone up due to changing currency rates,” Naveen says.

The declining value of international tourism to the hotel industry only underlines the need for Philadelphia to be more than just a tourist destination. As the city’s economic profile grows, its hotel industry is poised to capitalize.