GLOBAL REPORT - Global hotel supply is expected to grow an average of only
2.4% over the next five years, according to JLL’s latest research. That is
180bps less than the long-term supply growth average as the number of rooms in
construction has declined nearly 8.5% from its 2019 peak driven by higher costs
and ongoing supply chain disruptions.
JLL expects slow supply growth to benefit existing hotels,
particularly as demand continues to recover. Hotels in urban cores and other
high barrier-to-entry markets will likely see the largest benefit.
As organic new supply growth slows, hotel brands have begun
to use their balance sheets to fuel net unit growth, a key driver of
shareholder value. Hilton has thus far been the most aggressive, acquiring both
Graduate Hotels and NoMad hotels for a combined $275 million and JLL expects others
to follow suit in the coming months.
Hotel Investment Today reached out to Zach Demuth, global head
of Hotels Research for JLL Hotels & Hospitality, to get further insights
into the potential impact of slowing supply growth.
Hotel Investment Today (HIT): Longer term, when is
supply growth going to increase? In other words, when will costs and disruption
become more manageable?
Zach Demuth: We have already started to see some
mitigation in construction cost pressures, at least on the materials side,
although development financing and labor still generally remain a challenge.
Given the amount of time it takes for hotel construction and the likely
viability of some of these projects coming to fruition, we anticipate that
supply growth will materially accelerate in 2029/2030.
HIT: Simple supply-demand suggests the values and
prices to be paid for existing assets should go up during this five-year
stretch. How much will asset prices increase due to muted supply growth?
Demuth: Yes and no. We do believe that lack of supply
growth will fuel average daily rates in many markets (from the traveler’s
perspective) but the same isn’t necessarily true for asset values (from an
investor perspective). High debt costs and continued operating cost pressures
will generally offset any asset value growth over the short to medium term.
However, over the longer term, we do anticipate an increase in asset value,
particularly in urban cores where supply growth is expected to slow down the
most thereby making the cost-to-buy materially less than the cost-to-build.
HIT: Beyond the “Big 5” hotel companies acquiring
bolt-on brands, what is your expectation for growth and growth strategies
amongst second- and third-tier hotel companies?
Demuth: We have already seen private equity groups
and some sovereign wealth funds aggressively invest in hotel OpCos to help fuel
growth. For example, Luxor Capital Group’s investment in Montage, MSD Partners’
investment in Auberge and PIF’s investment in Aman. We expect these types of
investments to accelerate even further as new supply growth remains limited and
brands look to increase their market share.