Philly is performing ‘reasonably well,’ but growth is slowing

PHILADELPHIA—While the overall region is doing well, finishing 2016 with increases across the board, RevPAR, occupancy and ADR are expected to drop this year.

“The market, in general, is performing reasonably well—particularly the Center City submarket,” said Peter R. Tyson, managing director of CBRE Hotels, adding the Philadelphia market now has a total room supply of 46,636.

Philadelphia hotels finished 2016 with a RevPAR gain of 5.1%, which was higher than the national average of 3.2%, according to the most recent Hotel Horizons report by CBRE. Occupancy increased by 1.6% and ADR saw a gain of 3.5% in the same year.

“Philadelphia faces its first ‘normal’ year since 2014,” said Mike Murray, COO of HHM. “We anticipate growth to slow, with convention activity down from last year, new supply coming to market, negligible growth in the corporate sector and the absence of the two special events that highlighted 2015 (the Papal visit) and 2016 (the Democratic National Convention).”

Supply increased by 1.4% in 2016, while demand increased by 3%. The same study projected a jump of 2.4% in supply and an increase of 0.7% in demand for 2017.

“Generally, supply, demand and ADR are all forecasted to increase through 2021,” Tyson noted. “However, the forecasted (and real) increases in supply will dilute the market somewhat, particularly in Center City, resulting in lower occupancies and dampened increases in ADR, leading to some declines in RevPAR. Generally, the transient commercial market continues to grow at modest rates with no major corporate in-migrations to the area. The Pennsylvania Convention Center has solved its customer satisfaction issues and bookings are extremely strong in the coming years. Individual leisure demand continues to grow at a strong pace.”

While ADR is expected to remain somewhat stagnant for 2017 (dropping slightly by 0.1%), it’s projected to rebound in 2018, increasing to $136.42 (or by 3.5%). The following year, there’s an expected gain of 1.5%, moving ADR to $138.41—and in 2020, the same report forecasts ADR to be $140.16 (an increase of 1.3%). For 2021, CBRE has projected an increase of 1.9% (moving ADR for the fiscal year to $142.78).

CBRE is expecting a decline of 1.8% for RevPAR in 2017, dropping to $89.86; however, RevPAR, according to the report, will see a slight increase in the following years, “primarily as a result to a material increase in supply,” Tyson explained. In fiscal year 2021, the report projected RevPAR in Philly to increase to $92.86 (an increase of 2.2%).

Some of the top upper-priced brands in the Philadelphia market include Marriott International’s Courtyard, Residence Inn, Sheraton and Marriott brands, as well as Hilton’s DoubleTree. Top lower-priced brands include Extended Stay America, Days Inn, Quality Inn, Motel 6 and Holiday Inn.

In 2016, upper-priced properties finished ahead of lower-priced ones, gaining 3.4% in ADR and 1.9% in occupancy. Lower-priced hotels during 2016 saw an ADR growth rate of 3.5% and a 1.1% gain in occupancy. Upper-priced hotels are expected to drop by 0.4% in ADR and see a decrease of 2.8% in occupancy for fiscal year 2017. Lower-price properties are projected to see an increase of 1.7% in ADR and a drop of 0.2% in occupancy during the same year.

In 2016, the Center City submarket—which consists of properties located in the downtown district of Philly within the market east and west office corridors, the convention center, the Independence Mall and the University of Pennsylvania—saw an increase of 6.7% for RevPAR, a gain of 1.6% in occupancy and a jump in ADR of 5.0%. The total room supply in this highly popular submarket, as of Q4 2016, is 11,485.

Lokal Hotel, a six-unit boutique hotel, is now taking reservations. Photo: B. Krist for Visit Philadelphia

Philadelphia itself is continuing to draw more overnight leisure travelers. Hotels in the Center City reached a landmark of one million leisure room nights in 2016, according to data published by Visit Philadelphia, the region’s official tourism marketing agency.

What’s impacting this submarket? Airbnb. “We don’t forecast for Airbnb, but we acknowledge that the supply continues to increase at rates greater than hotel supply and that the impact is felt by the hotels in the area, particularly Center City,” Tyson said. Pulling data from Airdna, a data and analytics firm with a focus on Airbnb rental performance worldwide, CBRE found an increase in occupancy of 49.9% in 2016 (a year-over-year change of 17%). In the same year, ADR increased to $125.41 (an 11.7% jump from the year prior), as well as RevPAR, jumping to $62.52 (an increase of 30.6%).

“Airbnb has had a more meaningful impact in markets like New York City, where access to residential units is much greater,” Murray said. “While Airbnb does have inventory in the Philadelphia market, it tends to be most attractive to leisure travelers seeking a value for a longer-term stay. Hotels that cater primarily to business travelers and convention attendees will see less erosion from Airbnb’s presence than hotels catering only to leisure travelers.”

Available Airbnb supply in 2016 hit 813,671 rooms, a year-over-year increase of 86.6%. Units sold last year increased to 405,798, a jump of 118.1% from the year prior.

As far as what’s in the Philadelphia supply pipeline, Hotel Horizons revealed the following: A total of 21 upper-priced properties, a total of 37 lower-priced hotels and a total of four independent or unclassified properties are in one of four stages: unconfirmed, planning, final planning or in construction.

A handful of new hotels have already opened this year, including The Study at University City; AKA University City; WM. Mulherin’s Sons; Best Western Plus Philadelphia Convention Center Hotel; and Lokal Hotel, a six-unit boutique hotel. Aloft Philadelphia Downtown is expected to open in June.

Hotels expected to open in 2018 include: Cambria Hotels & Suites Philadelphia; Four Seasons Hotel Philadelphia; Hyatt Place; W Philadelphia; Element Philadelphia; and Parker Spruce. As for the following year, Hyatt Centric is expected to open in April 2019.

“With significant new supply coming to Philadelphia in the full-service tier, we believe pricing power will be negatively impacted as the new hotels ramp up to stabilization over the next few years,”  Murray said. “The convention center will need 30-plus distinct programs each year in order for the industry to absorb the new supply. The team at the facility can get this done, but it does not happen overnight.” HB

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