Home Commercial Supply is on the Verge of Outpacing Demand in Seattle’s Hotel Market

Supply is on the Verge of Outpacing Demand in Seattle’s Hotel Market

Employees Retirement System of Texas, Texas Employees, San Francisco Bay Area, Seattle, Austin

By Brittan Jenkins

Kidder Mathews released their 2016 fourth quarter hotel performance report indicating the Seattle area is about to crest, with new supply on the verge of outpacing demand. With nearly 5,000 rooms under construction and even more planned, Kidder Mathews expects reduced occupancy rates and intensifying price competition.

“This year, and for the last couple of years, occupancy in downtown Seattle has been over 80 percent, which is remarkably high for most hotel markets,” said John Gordon, senior vice president with Kidder Mathews. “So it’s been quite a good time to own and operate hotels, and because the occupancy rate has been so high, it’s a very attractive market for developers.”

Gordon said the hotel market in the Seattle area tends to operate on an 8-10 year cycle so over that interval, occupancy rates gradually increase as demand grows with more people in the area improving economic conditions. But hotels in downtown Seattle have completed a fifth year of record performance, according to the report. Kidder Mathews estimates the 2016 market occupancy rate for the upscale tier at 84 percent, the highest annual rate in over 30 years.

This is all part of the normal business cycle, it’s not a tragedy, it’s not unexpected, this is just how it works

“What you’re seeing now is what happens in each business cycle,” Gordon said. “Occupancy starts to peak when new hotels start to open and depending on how many new rooms enter the market, occupancy rates will decline, and it may be a soft landing or it may fall off a cliff.”

Gordon said in the early 80s, occupancy fell below 60 percent, which, for an urban property, is not sustainable. But what’s happening now, according to Gordon, is somewhat reminiscent of that era. There is a very large increase in supply, which may result in market occupancy rate in Settle dropping below 70 percent by 2019 or so.

“The demand for hotels in Seattle is not going down, it’s continuing to increase,” Gordon said. “The market occupancy percentage is simply the ratio of supply and demand. So we could have demand growing at 5 to 10 percent a year, but if the supply grows by 20 percent then the occupancy percentage will go down.”

However Gordon said the inconsistency in the rate of supply and demand isn’t something to worry about. “I don’t see anything to indicate there will be a drop in demand… I would expect the market demand to increase strongly,” he said. Gordon added that this is the largest surge of new development in one year that he’s seen. At the same time, he said, demand has been stronger than most people have seen.

The report found that four new hotels were completed in King, Pierce and Snohomish Counties during 2014, eight opened in 2015, and five opened in 2016, numbers Gordon describes as abnormally high. The tri-county market now includes 296 properties and about 44,000 guestrooms. In total, 22 hotels with nearly 5,000 guestrooms were under construction with more than 40 additional projects totaling nearly 7,000 rooms proposed.

Hotels opened during 2016 include the Residence Inn in the University District, the Hampton Inn & Suites near Northgate Mall, and the Thompson Hotel in downtown Seattle. Four hotels are under construction in the central business district, including the 1,260-room Hyatt Regency and two more are underway in South Lake Union.

Unsurprisingly, the highest average daily room rates for upscale hotels in downtown Seattle was well over $200, according to the report. Hotels in King County had the most significant increases in room prices as compared to the prior year. As a whole, the average increase was 3.3 percent.

All in all, there were 23 sales of hotels in the tri-county region with prices exceeding $2 million. The aggregate transaction volume was $867,880,000. With 3,792 guestrooms, the weighted average price per room was $228,871. This was both the highest volume and the highest price per room since the recession, according to the report.

The largest sale was the 384-room full service Marriott Hotel in downtown Bellevue. It opened in 2015 and sold in January 2016 for $175 million, which rounds out to $455,729 per room. Hotel 1000, a 120-room hotel in downtown Seattle was also purchased in January for $83.5 million or $695,833 per room, the highest price per room ever recorded in this market.

Other sales between $20 million and $100 million included hotels in Bellevue, South Lake Union, Tacoma and Tukwila. Sales under $20 million ranged from $53,750 per room to $163,253 per room.

In downtown Bellevue, where two hotels have opened within the past two years, the market occupancy rate is edging downward – a trend Kidder Mathews is seeing in neighboring areas like North Seattle, Kirkland and Bellingham.

Three hotels in downtown Bellevue are under construction and expected to open in 2017. Those include the Marriott AC, the Hilton Garden Inn and the W Hotel at Lincoln Square.

Gordon said the Bellevue CBD market currently has about 3,300 guestrooms, and there are three hotels under construction.

“Bellevue will be a good example of a market to watch,” Gordon said. “It’s not surging like South Lake Union is but even though demand is strong and will continue to grow, the number of rooms coming in is likely to lead to a pretty significant drop in the occupancy percentage,” he added.

In the pipeline for the Puget Sound region, is a proposed five-story structure containing 99 hotel rooms, 4 live-work units and 10,500 square feet of retail space at 5244 Leary Ave NW. Another hotel proposal located at 1001 Westlake Ave N is a seven-story building containing 81 hotel rooms and 4,000 square feet of ground level retail space and 1,700 square feet on the 7th floor. Additionally, Hampton Inn Suites at 700 5th Ave N is also hoping to add 25 new guestrooms to bring their total to 233 rooms. A Seattle design review board early design guidance meeting is set for February 1.

Gordon said while some markets might become saturated, the demand for hotels isn’t going anywhere. “I don’t want to scare people by saying the market is collapsing because it’s not. There’s still a whole bunch of people wanting to stay in hotels” Gordon said. “This is all part of the normal business cycle, it’s not a tragedy, it’s not unexpected, this is just how it works.”