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Commercial Marketplace 1999


Commercial Marketplace 1999
February 18, 1999

Hotel market: Let the good times roll

Wolfgang Rood Hospitality

By most measures, 1998 was an excellent year for the Seattle hotel market. Even though several new hotels opened during the year, the average occupancy in Seattle increased to 78 percent from 77 percent in 1997. In addition, the average room rate for Seattle hotels increased to $128 from $120.

The two other major lodging markets in the region, Bellevue/Eastside and SeaTac/Southcenter, also did comparatively well.

The Bellevue/Eastside lodging market, while showing a decline in occupancy from 78 percent in 1997 to 74 percent in 1998 also reported the highest increase in the average room rate, 7.4 percent, to $103 in 1998 from $96 in 1997.

The SeaTac and Southcenter market ended the year with a 75 percent occupancy, a 0.9 percent increase over 1997. Here, the average room rate increased by 5.7 percent, to $85.

The Seattle lodging market performance becomes even more impressive when viewed against the background of the 1998 experience of other lodging markets. For that perspective, we compared Seattle with 40 other major city lodging markets across the United States.

Only 3 other cities did better

Surprisingly, only three other cities across the nation achieved a higher occupancy than the 78 percent recorded for Seattle. These cities were San Francisco, reporting 80 percent occupancy; New York City (82 percent); and Boston (80 percent). Seattle ranked well ahead of such popular visitor destinations and commercial centers as Los Angeles (74 percent), Honolulu (74 percent), Denver (70 percent), and Phoenix (69 percent).

Bell Street Pier
The Port of Seattles cruise ship terminal at Bell Street Pier will mean a big boost for downtown hotels.
The average 1998 occupancy for all 41 cities was 72.6 percent, more than five percentage points below the 78 percent occupancy achieved in the Seattle market.

One major reason for this difference is that on a national basis, 1998 was the first year since 1991 when supply growth exceeded demand in most urban centers. Primarily because of the effect of new hotels added to the supply, hotels in the major cities of the U.S. posted a 1.6 percent decline in occupancy from the prior year, with 28 of the 41 cities reporting declining occupancy. Seattle was one of only 10 cities showing an improvement in occupancy over 1997.

Room rates up 7%

How about average room rates? Driven by the comparatively high occupancies and the addition of new hotel rooms, the average room rate in the Seattle market increased by 7 percent, from $119.54 in 1997 to $127.90 in 1998. Of the 41 cities, only 10 others were able to achieve a higher increase in average room rates; for all cities the average rate increase was 6.9 percent, from $105 in 1997 to $112 in 1998. The lowest average room rate was in El Paso, Texas, at $51.75; the highest was New York City, at $214.

So where do we go from here?

Judging from recent performance and current trends, we believe the long-term outlook for the lodging market in Seattle is for continued high occupancies and increasing average room rates. Why? Because the variety and quality of hotels in the Seattle area are very competitive with other major cities; the threat of overbuilding appears to have become less acute; the basic economic factors in the Seattle area appear to be solid in the long run; and Seattle is becoming ever more popular to tourists, convention visitors, and commercial demand sources. Consider the following:

  • Hot town. Seattle has become a modern city with a great variety of excellent lodging accommodations, meeting the requirements of the traveling public very well. New construction is adding new and convenient hotels designed to satisfy the demand of different sources and preferences. Excellent choices of fine accommodations for convention guests, for commercial travelers, for extended stay guest on a limited budget, and for executives and leisure travelers looking for fine boutique hotels or other new upscale accommodations currently exist or are being added to the supply.

    Lodging Market Performance, 1996 - 1998
    Area Year Occupancy % Increase Average Room Rate Increase
    Source: Wolfgang Road Hospitality Consulting.

  • New hotels. The Seattle lodging market now offers some of the newest accommodations among major cities in the United States. Even many of the older hotels were developed fairly recently, in the early 1980s, and have undergone substantial renovations. With the new hotels which opened since 1990 or currently under development, few other cities in the U.S. can offer a better variety and quality of accommodations targeted to specific traveler demand.

  • Supply growth slowing. During the last three years, the danger of overbuilding new hotel rooms became a real possibility. Many new, typically smaller limited service hotels were added to the rooms supply. In addition, at the end of 1998 there were over 2,500 hotel rooms in various planning or development stages in Seattle, over 3,000 rooms planned for the Bellevue/Eastside market, and more hotels planned in the airport area and other suburban locations. If all these projects were to be completed, an oversupply of rooms would result which would take the market at least several years to absorb.

    However, this danger appears to have eased. Starting during the summer of 1998, stock prices on Wall Street real estate investment trusts declined sharply, with the value of lodging REITs declining an average of 38.3 percent in 1998. This decline, as well as some worry about the national and regional economies, is causing some banks to look more critically at financing hotel projects.

    As a result, the growth in new lodging supply will probably slow in 1999. Some planned projects may be delayed or even abandoned, since most, especially larger projects, will be more difficult to finance now. This will be considered good news by existing hotels, making it easier for them to maintain sound levels of occupancies and room revenues.

    Of course, there is always the possibility of a regional or national economic downturn, which could seriously affect travel and lodging. But the basic economic factors in the Seattle area seem to be solid, even considering the announced Boeing employment cuts. While these cuts are expected to have some adverse effects on the local economy, it is unlikely they would substantially reduce Boeing related business travel and lodgings in Seattle.

  • High tech growth. The technological industry, led by Microsoft in Redmond, continues to draw international attention, with its phenomenal growth and wide acceptance of its software. Microsoft and the many other technological companies who have established themselves here, bring in a very significant number of commercial and employment related lodgings, and are expected to continue to do so in the future.

  • WSCTC expansion. The Washington State Convention and Trade Center is planning a $170 million expansion, including additional exhibit space, office space, parking, and an additional 460-room downtown hotel. The expansion could be completed by 2002 and should impact Seattle area convention demand substantially by allowing space for larger groups and conventions. Seattle is a very popular destination for meetings and conventions, and is attracting some highly visible groups, such as the major meeting of the World Trade Organization to be held in Seattle next year.

  • Downtown development. The Seattle downtown is going through a major renaissance, and is developing into one of the finest downtown shopping, entertainment and commercial centers in the nation, a real attraction to visitors and domestic and international hotel guests.

  • Cruise ships. In addition, the Port of Seattle plans to construct a multi-purpose cruise ship terminal at the Bell Street Pier to position Seattle as a homeport for Alaska cruises. This is expected to bring in a substantial number of tourists. Many other major developments are underway, including the $498 million Mariners stadium to open in 1999, and the planned new Seahawks stadium.

  • SeaTac expansion. The SeaTac International Airport is expanding with its third runway and terminal improvements, enlarging future capacity drastically. A 385-room, 14-story Westin Hotel is also about to start construction here, if some final regulatory obstacles can be overcome. Substantial increases in passenger capacity will enable easier access to the Seattle area for domestic and international visitors.

    All of these factors are adding fuel to the general perception of travelers that Seattle and the Puget Sound region are scenic, safe and friendly visitor destinations. Even if often cool and rainy, this is considered to be a desirable place to visit, offering a great variety of cultural, recreational and business opportunities.

    Across the nation the outlook for hotels located in major cities is for a continued decline in occupancy, accompanied by moderate growth in average daily room rates in 1999.

    For the Seattle area, the outlook for 1999 also is for some decline in average occupancy and slower growth in average room rates. But while market occupancy is expected to decline somewhat in 1999 as projects currently under construction enter the market, growing demand is expected to absorb these guestrooms within a relatively short time.

    We believe the Seattle lodging market will see a two-percentage point decrease in occupancy in 1999, to 76 percent. We then expect market occupancy to increase again to approximately 78 percent by 2001. The Seattle average room rate is expected to increase at a more moderate three percent rate in 1999, at a three to four percent rate in 2000 and then to increase at or slightly ahead of the rate of inflation in future years.

    While the outlook for the Seattle lodging market appears to be very good, there are great differences in the performance of individual hotels based on their specific location, the type and quality of facilities available, direct competition, management, services rendered, and similar factors.

    The developers of any new hotel project will have to carefully analyze those market factors that apply to their project specifically, in order to set the stage for successful future operations and attain a sound share of market demand.

    Wolfgang Rood, CPA, is a principal in Wolfgang Rood Hospitality Consulting. The data included in this article was based on research and surveys performed by Wolfgang Rood Hospitality Consulting and PKF Consulting. Year-end 1998 statistics are subject to minor adjustments as survey data is finalized.


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