Atlanta’s Limited-Service Hotels
With supply levels in check and demand returning, performance fundamentals of limited-service hotels across Atlanta are regaining balance.
By Mike Brophy
October 5, 2010
Limited-service hotels (including extended-stay properties) play a somewhat unsung role in Atlanta’s lodging industry. But the fundamentals of this asset class have held up well in the recession, and the ratio of supply to demand has heavily favored limited-service properties in the city. According to the evidence presented below, this trend is likely to continue in the near future.
Supply
Atlanta’s lodging landscape is diverse, consisting of seven major submarkets. The following map of greater Atlanta illustrates their geography:
Hotels belonging to the limited-service asset class are spread throughout the city, predominantly in the Perimeter, Cobb-Galleria, and Airport submarkets, as well as along the Northeast Interstate 85 corridor. Hotels in the Downtown, Midtown, and Buckhead submarkets cater more to the full-service-oriented traveler, though these submarkets also feature a good share of limited-service properties.
Atlanta saw an influx of new hotels in the mid 1980s during the summer Olympics. This resulted in an overbalance of full-service hotels, allowing the limited-service segment to grow steadily across Atlanta through 2007. The increased limited-service supply was perfectly suited to the rise in demand from rescue crews and displaced residents following Hurricane Katrina.
Supply additions in the Atlanta metro area over the past two years have come almost exclusively in the form of high-end luxury hotels, mostly in the Downtown, Midtown, and Buckhead submarkets. The lack of new competitive limited-service supply has helped existing properties recover quickly in 2010.
Hotel Demand
Demand has grown significantly in the Atlanta market, up approximately 8% compared to the same period last year. In fact, occupancy in Atlanta has almost returned to pre-recession levels. Increases in the first half of 2010 were led by one of Atlanta’s strongest citywide convention seasons in years. All submarkets benefitted from compression from downtown conventions; the complimentary Internet and breakfast offerings and lower rates of limited-service hotels tend to attract price-sensitive conventioneers. Deeply discounted hotel rates across the board proved an effective lure, and attendance was up for all conventions over the same period of 2009.
One of the biggest drivers of demand for limited-service hotels in the northern submarkets is CSX Railroad. In 2009, CSX canceled training programs for the entire year, causing demand to recede approximately 10-20%. CSX resumed training activity in early 2010, creating a tremendously positive impact on the limited-service segment, with many hotels in the Perimeter and Cobb-Galleria submarkets selling out for six weeks at time.
Tourism has also picked up in 2010. Atlanta is replete with tourist attractions, from the World of Coca-Cola to the Georgia Aquarium. Discounted hotel rates and Atlanta’s position as a convenient and attractive southeastern destination have drawn a large flock of budget-conscious travelers who might otherwise have vacationed overseas.
Some forecasts had envisioned a slowdown in demand in the latter half of 2010 as the strong downtown convention season was expected to trail off. But with the recovery of the local economy and increased travel, hotel performance in Atlanta’s submarkets has remained strong, and expectations point to growth through the end of the year.
Hotel Performance
Occupancy for the Atlanta market has regained vigor in year-to-date 2010. Most submarkets have seen occupancy rise approximately 8% over the same period last year, with the greatest impact coming from the limited-service, select-service, and extended-stay segments.
The large number of luxury hotels new to the market in 2009 and 2010 offered very low introductory rates to attract demand, allowing limited- and select-service patrons to trade up for a relatively negligible cost. As the new high-end supply has begun to stabilize in 2010, full-service hotel rates are rising quickly, bringing the displaced demand back to limited-service hotels.
Hotels began to increase rack rates in September of 2010 at an average of 8%. High occupancy levels experienced so far in 2010, and the expected continuation of this trend, have supported the increase in rate. Big-business, high-volume Local Negotiated Rate (LNR) accounts are the backbone of demand for many limited- and select-service hotels. LNR rates are negotiated yearly and supply a steady stream of demand for a given hotel throughout the year. Atlanta hoteliers expect LNR to rise 10% over 2009 negotiated rates and have reportedly met with very little resistance to these rate increases. This is positive news with respect to prospects for rate growth, as average rate was the performance metric hardest hit in 2008 and 2009.
The Future
The Atlanta market is expected to rebound quickly given the large number of corporate headquarters located in the metro area, the ease of access to and from the city, major tourism attractions, and a recovering economy. A new international terminal at Hartsfield-Jackson Atlanta International Airport is also expected to stimulate a surge in international business and hotel demand, with an opening scheduled for April of 2012.
Other positive factors include a strong line up for the 2010/11 convention season and the aforementioned training activities of CSX Railroad. The biannual AmericasMart Atlanta, a mammoth congregation of exhibitors and buyers of a wide range of retail goods, had a large uptick in attendance in 2010. Attendance is expected to be even stronger in 2011 as an improving economy prompts retailers to increase their inventories. As local headquarters companies such as Home Depot and Cox ramp up hiring and business levels, they will be sending more business to Atlanta hotels. Smaller companies that support or contract with the major players should also provide increased demand.
Limited-service hotels benefited from the limited new supply that entered the market over the past two years. Few financing avenues remain open even now, and new developments are expected to be marginal in the near term, allowing the limited-service market to rebound quickly. Hence, with improving performance fundamentals and a resurgence of demand oriented toward hotels in this asset class, the limited-service segment stands to gain ground in Atlanta.