Denver has experienced tremendous macro-economic growth through the current economic cycle. The city’s recent prosperity is driven by multiple factors, including the in-migration of well-educated new residents, strong GDP growth and major corporate relocation and expansion to the metro area. Denver’s growth has spurred an influx of commercial real estate development across all property types. A major benefactor of this new development is Denver’s lodging market. Denver has historically been an under served hotel market with a significant amount of pent-up demand across the city. According to PKF Hospitality Research, the Denver Metro lodging market contains 44,437 rooms across 318 hotels.
The Denver lodging market benefits from its thriving downtown core, abundance of state government activities, world-class athletic events, top-ranked convention facilities and an array of outdoor attractions, including prime access to the Rocky Mountains. Denver’s ideal mix of corporate, leisure, education and government demand generators and year-round temperate climate allow the metro’s lodging market to achieve consistently high occupancy levels throughout the year. Both the Downtown and overall Denver hotel submarkets have consistently improved since 2010, achieving very strong growth across all three key performance metrics. Revenue per available room (RevPAR) has increased a massive 58.7 percent in this time frame.
These record performance levels and significant demand has opened the doors for new hotel development across the metro. Currently, there are approximately 3,763 keys under construction and 2,033 keys in planning. In total, there are 5,796 new hotel rooms in the supply pipeline across the metro area spanning from Denver International Airport to Boulder through the CBD and throughout the suburbs. In addition, 1,263 keys have been delivered in the last 12 months. This new supply represents a 15.8 percent increase in new hotel rooms from current inventory – the largest increase in hotel rooms in Denver’s history. The most significant hotel development in the Denver metro area is the Gaylord Rockies Convention Center, which will deliver 1,500 keys to the airport market in the second quarter of 2018.
Given the scope of Denver’s hotel supply pipeline, concerns have arisen from lenders, investors and developers regarding the impact on the current lodging market. Denver benefits from a truly diverse demand base ranging from corporate, leisure, university, athletic and many other demand drivers that when coupled with the city’s strong macro-economic base provide for quick absorption of new product. HFF is actively involved in Denver’s hotel capital markets arena, and has worked to educate our clients on the multitude of mitigants and major benefits of Denver’s much needed hotel supply, including the continued growth of visitors to the city and the many jobs the new developments will create.
Denver is a "Top 12 Meeting Destination" in the United States and continues to grow its convention presence, which mitigates the risk of new hotel supply as demand continues to increase. The 2.2 million-square-foot Colorado Convention Center (CCC) is quickly positioning itself as a major player in the national convention center market. In 2016, the CCC hosted 967,543 attendees at more than 213 events, with anticipated growth of five percent in 2017 and 2018. Visit Denver recently announced the CCC will be home to the Outdoor Retailer’s summer and winter trade shows. Visit Denver, Denver's Convention and Visitors Bureau, anticipates the trade show will bring 45,000 annual attendees to Denver and will have an economic impact of $45 million over the initial five-year contract. This new trade show will be one of approximately 10 city wide sellouts each year that currently strain the metro lodging market. Continued new hotel supply in Denver will allow the city to market to larger convention users, ease pent-up demand and allow for additional rooms for leisure and corporate users not connected to convention business.
Denver’s lodging market also benefits from significant leisure and corporate demand. Award-winning restaurants, a multitude of recreational amenities, a strong university presence with more than 45,000 full-time students in the city and very unique experiences make downtown Denver a world-class destination. In 2016, Denver hosted a record-setting 31.5 million overnight visitors, according to Longwoods International. This represented an 11-percent year-over-year increase from 2015 and a nearly 50 percent increase over the last five years. Additionally, there is currently two million square feet of office space under construction in the Denver CBD, with an average of 50 percent pre-leasing. This major influx of new office space will further mitigate impending hotel supply as Denver’s corporate travel base continues to grow. Furthermore, downtown Denver’s direct light rail connectivity to Denver International Airport allows for convenient travel for visitors enjoying the city even for a short amount of time.
Denver hotel supply, specifically in the CBD, is dominated by independent boutiques or soft-branded hotels that cater specifically to leisure travelers. As Denver continues to be a major tourism destination, this new supply will quickly be absorbed as travelers seek out lodging that provides another unique experience in addition to the city itself. The new hotel supply in Denver represents some of the most innovative, best designed hotels in the country. The hotels themselves and the amenities they plan to offer will continue to raise the profile of the Denver market and attract new leisure, corporate and group travelers to the market.
The last and most important mitigant to Denver’s supply pipeline is the strength of Denver’s lodging market. Paralleling the metro’s surging economic growth and diversification over the last several years, Denver’s lodging market has seen tremendous growth in fundamentals with a RevPAR compound annual growth rate of 9.2 percent, ranking fifth in the country among U.S. top 25 markets since 2009. Within the CBD market, specifically, hotels boast a RevPAR premium of more than 50 percent compared to the broader market, a testament to the area’s dynamic environment and premier amenities. Twenty-seventeen and 2018 are expected to continue the strong performance trend for the Denver lodging market. PKF Hospitality Research is forecasting a slight increase in occupancy of 60 basis points, in spite of the new supply being delivered to the market. PKF is also forecasting a strong four percent increase in Average Daily Rate (ADR) as macro-economic fundamentals in Denver continue to improve. These forecasts result in RevPAR growth of 4.6 percent over the next two years. Denver’s historic hotel market performance positions the metro to successfully absorb new supply and continue to serve pent up demand.
HFF’s Hotel Team has spent considerable time analyzing Denver’s lodging market in order to best advise our clients on capital markets transactions in the metro. Though the market will see a supply increase of approximately 15.8 percent of current inventory, HFF expects Denver to quickly absorb this new supply. Denver’s strong population growth, employment expansion and in-migration of companies to the Denver market will continue to drive demand for hotel rooms for a diverse base of travelers including leisure, business and group. Both Denver’s strong macro-economic fundamentals and robust lodging market performance position the market to receive and absorb new supply with little impact to operations of the current supply.
Tony Malk is a managing director in the Los Angeles office of HFF. He has more than 16 years of experience in commercial real estate and specializes in hotel investment sales and recapitalizations on the West Coast. Mr. Malk joined HFF in June 2016 from Eastdil Secured, where he worked since June 2000 as a director in the firm’s hospitality practice.
Tyler Dumon is a real estate analyst in HFF's Denver office with more than three years of experience in commercial real estate and finance. He is primarily responsible for performing financial and market analysis, preparing offering documents and coordinating the due diligence process for the debt and equity placement group.
Mr. Dumon interned with HFF in the fall of 2013 and summer of 2014 before officially joining the firm in October 2014. Prior experience also includes working with TMC Construction Services as a project manager.
Originally published in the Colorado Real Estate Journal.