Hotel construction booming for now – but trouble down the line?

Construction continues of the 22-story, 300-room dual-branded Residence Inn/AC Hotel atop the EpiCentre, on East Trade Street, Wednesday, August 3, 2016.
Construction continues of the 22-story, 300-room dual-branded Residence Inn/AC Hotel atop the EpiCentre, on East Trade Street, Wednesday, August 3, 2016.

If you think Charlotte’s apartment market is booming, take a look at hotel construction.

Spurred on by years of rising occupancy, higher room rates and a recovered business travel market, developers are rushing to build more hotels. In uptown alone, five new hotels totaling 1,000 rooms are under construction, with another eight hotels and 1,500 more rooms on the drawing board. That surge will increase the number of rooms in the city’s biggest hotel market by about 50 percent.

But all those added rooms raise the specter of overbuilding, threatening to drive down hotel rates and hurt the industry if demand doesn’t keep up.

“There is robust activity in Charlotte hotel development, potentially coming at a time when transient demand growth will slow,” the Charlotte Regional Visitors Authority’s most recent report on the state of the hotel market said. “With a robust supply pipeline, the question is what will happen over the next two to four years as these projects are finalized and open across the county?”

Another potential problem: House Bill 2, the new state LGBT law that’s generated controversy and caused some conventions and major events to cancel plans for North Carolina. Although supporters of the law point to North Carolina’s economic growth, people in the hospitality sector say they’re concerned after concert cancellations such as Nick Jonas and Demi Lovato and the NBA’s decision to pull the 2017 All-Star Game out of Charlotte, costing tens of thousands of hotel room bookings.

In Asheville, bed and breakfast operators said this week that they’ve seen a major drop in bookings. And on Thursday, the American Physical Society’s Division of Atomic, Molecular and Optical Physics moved a 2018 convention planned for Charlotte to Fort Lauderdale.

So far though, Charlotte’s hotel market still appears to be growing. The total number of rooms booked so far from July 2016 through July 2017 is up 3.2 percent from the same time last year, according to the most recent CRVA report.

“We’ve had continuous record-setting months,” said Tom Murray, chief executive of the CRVA. “We have very, very strong weekend demand. We’re starting to get much stronger weekend demand.”

The hotel building boom isn’t limited to Charlotte’s center city. Outside of uptown, at least 2,200 hotel rooms have been announced or are already under construction. In SouthPark, a 270-room Hilton Garden Inn/Homewood Suites is nearing completion on Sharon Road, while developers just won permission to build a 170-room AC Hotel on Rexford Road and a 225-room hotel on Colony Road. In Steele Creek, a 120-room Residence Inn and a 135-room Hampton Inn & Suites were recently announced.

The main reason developers are building so many new hotels in Charlotte right now is simple: Demand for rooms in existing hotels is booming. Average hotel occupancy in May was 78.5 percent, up from 73.9 percent a year ago in Mecklenburg County. That’s well above the U.S. average of 67 percent occupancy in May.

The average daily rate for a hotel room was almost $112, up from about $106 last year. And revenue-per-available room, a key hotel metric, was $87.75, up 13 percent from last year.

“It’s this long run of high occupancy and high room rates which generates high revenue in total,” said Sid Smith, executive director of the Charlotte Area Hotel Association. “That becomes very attractive to hotel investors, and hotel owners and builders, that this is a good market to put a piece of property in.”

Smith said the sharp increase in the number of hotels is less worrisome to him because the projects will be completed gradually, over the next several years. That should give demand time to catch up.

“With all these many different projects, they’re going to phase in one or two at a time,” said Smith. “If it all came on stream in one year, that would be a different story.”

Smith is keeping a wary eye on HB2. A compromise seems unlikely, with the law now in court and both sides dug in ahead of the November election. Smith fears that if the law isn’t changed, damage to the local hotel market could snowball.

“The losses we have now are this meeting, that meeting, the All-Star Game,” he said. “If this drags out, over time is where we’re going to see a significant and continuous negative impact from it.”

Murray said the No. 1 driver of travel in the Charlotte hotel market is people visiting friends and family, and that existing businesses also drive much of the demand. That won’t change because of HB2, Murray said.

“We think it’s too early to tell what’s going to happen to the group and convention market,” said Murary.

Birju Patel is president of BPR Properties, developing a 250-room Embassy Suites uptown that’s set to open in October. Patel says that while losing bookings from the All-Star Game was a “major blow” – the Embassy Suites is just blocks from Time Warner Cable Arena – he’s still confident in the long-term.

“I think the increase in hotel rooms is a good thing for Charlotte,” said Patel. With more hotel rooms, Patel said he expects Charlotte to be more competitive in the hunt for major conventions and events. “Most people look at it as ‘Competition is a bad thing.’ We think competition is a good thing.”

Smith said the added capacity will help lure events, but the city still won’t have the 1,000-room convention hotel that’s become a fixture in the industry. The new hotels underway are between about 200 and 300 rooms each. Charlotte’s current largest hotel is the 700-room Westin, which opened in 2003. The city invested about $16 million in the hotel.

“Our challenge as a city is we haven’t been able to put together the large enough room blocks to get some of the next higher-level meetings and conventions to come,” said Smith. “(Conventions) would like as many rooms under as few roofs as they could.”

A 1,000-room hotel, long talked about in Charlotte, would likely require a hefty public subsidy. Smith said he’s not aware of any current plans or developers interested in such a project.

Brian Leary, president of commercial and mixed-use development at Crescent Communities, said the development firm is in talks with two hotel operators for planned projects on Stonewall Street. The company has already announced one hotel at its Stonewall Station development, a 160-room Home2Suites.

“The fundamentals that are filling the rooms and driving rates up are the same fundamentals last year, this year and will be the same next year,” said Leary. He said that while he’s confident in the fundamental strength of Charlotte’s market, Crescent is seeing negative impacts from HB2.

“It is a problem. It is hurting our business. It’s stopped conversations we were having, very specific conversations with tenants,” said Leary. “I’m watching it closely enough to hit refresh on my browser screen five times a day to make sure I haven’t missed anything.”

Ely Portillo: 704-358-5041, @ESPortillo