The Boston economy continues to prosper with low unemployment and continued job growth. This has fueled positive hotel performance with a record occupancy of 76.5% achieved in 2015. The Great Recession of 2008/2009 seems like a distant memory as we are more than halfway through our 8th year of the economic recovery. According to Smith Travel Research, the Boston MSA ranks 5th in top 25 hotel markets in the United States in Revenue Per Available Room (RevPAR) behind New York, San Francisco, Oahu and Miami and the market commands the fourth highest Average Daily Rate (ADR) in the country. While these statistics are impressive and it has been a very strong run for the city, 2016 was the first “hiccup” year with RevPAR down year over year 0.6%. 2017 has been stronger with positive RevPAR growth of 2.4% through June YTD, but for the first time in many years room supply growth (3.1%) is outpacing room demand growth (2.8%). One of the factors that has elongated the run in Boston is extremely high barriers for new construction driven by high construction and land costs, a tight labor market, and a challenging permitting environment. Despite all of this, the 2017 numbers reflect a trend of supply growth catching up with demand growth and this means there will be winners and losers in the fight for room nights. Many submarkets have not had supply additions for ten or more years and, in cases where demand growth is limited, new product usually steals market share.

 In suburban Boston, the Residence Inn in Needham is a perfect example of a new product (opened in August of 2013) that is undoubtedly stealing market share and occupancy from older, dated competition in Dedham and Waltham. Several other new hotels are under construction in Needham and Waltham and they are all Hilton or Marriott select service brands (Hampton Inn, Residence Inn, Fairfield Inn and Homewood Suites) that have a very competitive operating model - limited food and beverage outlets and meeting space but offer free breakfast and new, very high quality room product. In the case of the Residence Inn Needham, most of the competition is thirty plus years old and it is an easy decision for the customer to choose “new” vs “tired and dated.” Even older properties that have been renovated to stay competitive underperform versus new product. Functional design challenges such as low ceiling heights, small bathrooms and inadequate HVAC systems cannot be changed. The hotel brand companies, particularly Hilton and Marriott, continue to push up the quality level of all of their select service brands that they franchise to developers. The late 80’s/early 90’s Hampton Inn or Courtyard by Marriott bears no resemblance to the current prototype for these brands. This new room product is competitive with any older full service Hilton, Marriott or Hyatt, and today’s customer has less need for a hotel restaurant and other amenities, particularly in an urban setting. In fact, a high quality fitness area is more important. The majority of millennials and Gen Y travelers are looking to explore the neighborhood they are visiting and dining at a hotel is usually not a preferred option. The shifting of market share from old to new is all part of the cyclical progression in the hotel business. In an up market, supply can be easily absorbed, however, in a flattening or down market, the new, “fittest” properties will greatly outperform and the oldest competitors will lose substantial market share. The Route 128 corridor is not the only sub-market that is experiencing supply growth and shifting of market share. Brookline, Cambridge, Watertown, Medford and Chelsea have all had recent hotel openings, most of which have been very successful. 

Another subset of new supply that the hotel companies are pushing is “lifestyle” product that targets specific demographics and promotes creating unique experiences for the customer. Marriott has spear-headed the launch of the Spanish brand AC Hotel in the US positioning the design as European modernism and promoting a unique “lifestyle” experience. There are now two AC Hotels open in Cambridge and Medford and two more under construction in Boston and Brookline. The look and feel of the product is very upscale with a sleek, urban design and customer feedback has been very positive. More of this type of lifestyle product is coming and will steal market share from older, tired properties. 

The last category of new supply entering the Boston market is micro hotels. Citzen M, Pod, Yotel and Moxy (backed by Marriott) are all relatively new micro hotel brands. A Yotel is under construction in Boston in the Seaport District and a Moxy is in planning for downtown. The prototype room in a Moxy Hotel is only 180 square feet, compared to 280 to 300 square feet for a typical Marriott or Hilton select service product. This allows a developer to fit up to 40% more room inventory in the same allowable square footage. The micro hotel rooms are very small with the emphasis on the bed and bathroom with very limited work space or furniture. The brands are primarily targeting millennials promoting style, design and an active bar scene. Each arriving guest is offered a free signature cocktail when you check into a Moxy. The jury is out on how successful the micro hotel brands will be but they are already very successful and competitive in New York City. 

Whether traditional, lifestyle or micro, new supply in Boston is very real and, as market growth abates, the “fittest” will outperform.

Jim Luchars is chief investment officer for Stonebridge Companies, a hotel development and operating company. Prior to joining Stonebridge, Luchars was a principal at AEW Capital Management overseeing all hotel investments. Luchars has over 25 years of experience in the hotel business and commercial real estate.

Founded in 1991 by Navin Dimond, Stonebridge is a privately owned, innovative hotel development and hospitality management company. They manage a portfolio of 45 hotels across the United States, and provide investor opportunities, hotel development services, hotel management services, and hospitality career opportunities to our partners and associates. Currently, their hotel portfolio is comprised of 7,000 guest rooms across multiple select-service, extended stay, mid-scale, and full-service hotel brands located in primary and secondary markets.