Tomorrow is Another Stay – Surviving Seattle’s Hotel Supply Glut

Tomorrow is Another Stay is a special section of the Kinzer Blog showcasing exclusive analysis and insight on the Seattle hotel & hospitality industry by Jena Thornton, a 25-year veteran of the industry.

A hotel data junkie with vast experience as an owner, operator and developer, Jena breaks down trends and offers forecasts for the fast-paced Seattle market.

As we embark on the summer 2019 tourist season in Seattle, hoteliers are met with a confluence of challenges and opportunities.

Positively, our sidewalks are filled with tourists, Elliot Bay is hosting over 200 cruise ship sailings this summer funneling over a million passengers through Seattle to and from Alaska each week. Paine Field, just south of Everett, is adding flights to its brand-new new passenger terminal. Our long-awaited Highway 99 tunnel is open and relieving traffic through the downtown core and one of the most significant tourist attractions, Pike Place Market, has been expanded.

We have roughly $60B in major tourism- and transit-focused public works projects underway in the region, including:

This is all in addition to the strong, continuing trend of private investment in the downtown core which includes more than 4.6 million SF of new Class A office space and more than 12,000 new residential multi-family units coming on-line in 2019.

So, with all this good news, why are hoteliers singing the blues?

The new Hyatt Regency looms over 8th Avenue & Howell Street downtown. 

Short-term pain, long-term gain

While demand is increasing, it is not increasing at the same pace as our supply. The 1,260-room Hyatt Regency opened in December 2018, which alone increased supply over 8.0% in the downtown core. Some other hotels that opened in Seattle CBD in 2018  & 2019 are:

  • 282-room Embassy Suites in Pioneer Square
  • 235-room dual branded EVEN / Staybridge Suites Hotel in South Lake Union
  • 96-room Palihouse Hotel near Pike Place Market
  • 229-room Charter Hotel at 2nd and Stewart (double check)
  • 146-room Moxy Hotel in South Lake Union
  • 142-room Sound Hotel in the Denny Regrade
  • 90-room State Hotel at 2nd and Pike

Not only are hoteliers in the region faced with absorbing significant additions to supply, they also must contend with the city’s homelessness issue and upward pressure on expenses. Labor costs have risen with new paid time off laws and minimum wage requirements, along with increased real estate taxes and insurance premiums.

Conventional wisdom might be to drop rates to gain market share in an absorbing market; however, this may not be the most strategic direction to preserve profit and long-term value. This is where owners and operators may need to consider losing the RevPAR penetration short-term game in order to win the long-term profit game. Operators need to implement sound pricing strategies that will focus on pricing for profit.

Believe in Seattle

In many ways, the world is watching us put a value on our city. From a macro point of view, Seattle is still an inexpensive destination for a world-class city. In fact, after googling “Most Expensive Cities to Visit in the US”, Seattle doesn’t show up on any top 10 list and consistently was less expensive than Nashville, Austin, Philadelphia and Atlanta. This doesn’t make sense! We are a world-class, globally-focused city that offers an unrivaled experience for our visitors.

We need a dose of pricing confidence. As we endeavor to tackle income inequality, create better schools, invent solutions to climate change and develop cures to our biggest ailments, with progressive policies widely voted in by our residents, we need to remember it costs money to deliver the safety net we desire as a community and to continue to invest in our infrastructure and our future.

The years 2019 and 2020 will be tough for occupancies as our hotels absorb the new supply but they don’t need to be years of significant rate erosion. Strong operators know how to flex their staffing guides and manage to a profit margin as demand fluctuates. This winter we endured the viaduct shutdown and “Snow-pocalypse” in February.

In spite of having mobility around the region significantly hindered and the city being shut down for 6 days due to snow that month, the Seattle CBD hotel market experienced an 11.9% increase in rooms revenue over the prior year for first quarter. While that is a spectacular number, it was eclipsed by the 15.7% growth in supply year-over-year. While many of our public works projects currently underway will create better infrastructure and ultimately help induce demand for hotel rooms in the region, unfortunately not many of them have coincided with the opening of so many new hotels.

Positive projections

Since 1987 (the year STR started tracking markets), there have only been two years that reflected a decline in actual rooms revenue generated in the market: 2001 and 2009. Given the “black swan event” of 2001 and widespread discouragement of business travel in 2009, it is no wonder these years were dismal outliers. As we look forward and project performance for the region, the outlook is positive. In fact, based on our estimates, we project that downtown Seattle will need an additional 2,000 to 3,000 rooms, in addition to the rooms currently under construction or been issued permits, to accommodate the anticipated demand by 2025.

What does this all mean for hotel owners and operators?  Have confidence in your city, your product and your service and don’t fall prey to deep discounting! The demand is here and they will pay higher prices if we deliver the experience of visiting a world-class city.