High hotel occupancy in a market is not necessarily an indicator of future hotel development.

During the “The Development sweet spot: Plotting hotel performance amid shifts in CRE supply” session at the 2021 Hotel Data Conference, CoStar Director of Hospitality Analytics Emmy Hise said an analysis of occupancy and supply growth in top U.S. markets shows that factors driving hotel development interest go beyond occupancy and demand for hotel rooms.

“There’s clearly more to the story than high occupancy for hotel development,” she said.

An analysis of the top 10 U.S. hotel supply markets from 2015 through 2020 studied factors such as population growth, employment growth, office square footage inventory increases, retail square footage increase, multifamily units and hotels — and how those factors coincided with development booms, which were qualified as adding 6,000 or more hotel rooms to the market.

Each of the top 10 supply markets had a boom in employment as well as population, but not always in that order, Hise said. Multifamily units were the first commercial real estate to be developed, followed by offices. Retail did not factor much into the trend.

“The last thing, and last among almost every single market, was hotels,” she said.

Another trend discovered during this analysis is growth typically stretched over more than one year, she said. Over the 10 markets, the period of population growth on average was the longest, spanning nearly four years. That was followed by multifamily development at 3.6 years and hotels at 3.5 years.

Of the top 10, one of the largest outlier markets is New York, Hise said. The increase in employment came first, but hotel development arrived second in order, not last, followed by multifamily and then office. New York has one of the highest occupancy levels as it is an already-established market, so occupancy levels stay high while new hotels are developed. The market’s population actually decreased slightly from 2017 to 2020.

“While we saw clear trends, you're always going to have an outlier market, so make sure to do your development research,” she said.

Seattle was one of the markets singled out for increase in hotel supply over the past 10 years.

Anneke Haggerty, a senior real estate analyst for developer McWhinney, presented a case study on one of her company’s future developments, the Tempo Seattle Downtown.

The hotel will be developed in the Denny Triangle neighborhood, two blocks away from Amazon’s headquarters as well as two blocks from the convention center undergoing a $2 billion expansion.

The property is 7,000 square feet, and the 300-room lifestyle limited-service hotel will have 23 floors, she said. The hotel will cater to corporate transient and leisure guests.

The timing of the development is favorable, and the company can break ground as early as the first quarter of next year if it can secure a construction loan, Haggerty said.

“If we are able to get a loan, it will be a 24-month build and will open in [the first quarter] of 2024 when Seattle’s economy is expected to be fully rebounded,” she said.

Seattle experienced an office supply boom from 2015 to 2017, followed by a hotel boom from 2018 to 2020, Haggerty said. Of the 10.5 million square feet of office space added between 2015 to 2017, Amazon was responsible for a few million, changing the corporate landscape of the neighborhood that was previously mostly warehouses.

“You can argue that hotel developers may have been attracted to this neighborhood after they saw or heard that Amazon was coming in,” she said.

Revenue per available room fell slightly in Seattle from 2018 to 2019, likely the result of the December 2018 opening of the 1,260-room Hyatt Regency Seattle, she said. The market’s RevPAR dipped because it didn’t have the expanded convention center to complement the amount of new hotel rooms that had just opened.

However, while hotel occupancy dropped, demand held because Seattle is a diverse market, she said. It has a cluster of talent and research centers, including the Bill and Melinda Gates Foundation, the Fred Hutch Cancer Research Center, the Seattle Children’s Research Center and UW Medicine — a hub for artificial intelligence and machine learning.

That matters to hotel investors because researchers will pay high average daily rates when staying in hotels, she said. Unlike with other tech businesses, researchers can’t work from home.

“When we see a market with a lot of lab space coming online, that's very exciting,” she said. “There's over 4 million square feet of potential lab space coming online in Seattle, which is very exciting for us."

Top hotel development markets were determined based on total room inventory as of June 2021 and supply forecasts for June 2026, Hise said.

Forecasts for population growth did not always line up with employment projections, which Hise said could be the result of more remote working options. Potentially hot markets for hotel development showed growth in at least two of four metrics — population, employment, office square footage and multifamily units.

Markets such as Austin, Texas, and Nashville, are in a continued hotel development growth cycle. Phoenix is also expected to continue its cycle of growth, and Seattle is a market to watch, Hise said.

Boise, Idaho, was the only city to have forecasted growth in all four metrics, she said. Huntsville, Alabama, isn’t showing much growth in population, but a lot of commercial real estate is expected. In Naples, Florida, the population is growing though commercial real estate growth hasn’t happened yet, but that may be because the market has high barriers to entry.

While the analysis has revealed some trends to help identify which markets could be up-and-coming hotel development markets, the coronavirus pandemic could shift the cycles of growth, Hise said.

“Just be aware that cycles could alter this trend that we're seeing,” she said.