The Hotel Development Cycle

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July 2, 2018
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July 17, 2018

The Hotel Development Cycle

Hotel development usually follows a period of approximately seven years. At the start of a cycle, rapid hotel development takes place with a number of new hotels entering a market. Cape Town is a point in case. Between 2009 and 2011, there was rapid hotel development in the city (partly in preparation for the FIFA World Cup). Over the period, an estimated seven new hotel developments (1 000 rooms) entered the market.

The new hotel development was accompanied by a decline in global travel due to the economic crisis. Subsequent to this rapid period of hotel development, there was therefore an oversupply of hotels in the Cape Town market. Hotel performance in the city declined, bottoming out at the end of 2011. This downward trend is common in a hotel development cycle, however, the decline was aggravated by the impact of the global economic crisis.

After a period of decline, a hotel market that has experienced new hotel development usually starts to show some form of recovery with more positive occupancies and ADR performances. In the case of Cape Town, the market returned to growth in 2012, with occupancy and ADR showing an upward turn. However, the market growth in 2012 was not sufficient to attract new investors, so between 2011 and 2016, there was limited new hotel development in the city. The lack of new hotel development gave the Cape Town hotel market time to recover, so between 2012 and 2016, occupancy and ADR in the city grew positively.

The more positive performance of the hotel market attracted the interest of investors and by 2017, Cape Town once again experienced rapid hotel development. In one year, four new hotel developments entered the market, including the Radisson Red, Radisson Blu Triangle House, StayEasy, and SunSquare. This equated to a total of 1 010 new rooms. Considering that most of the new hotel developments entered the market towards the end of 2017, the impact on the market was small. Occupancy and ADR growth did occur, albeit at a lower rate.

In 2018, the effect of the new hotel developments has become evident as occupancy in Cape Town has declined by almost 10,6% for the first four months of the year. Nevertheless, the decline in occupancy is not fully attributed to the new hotel developments. The Cape Town water crisis has also negatively influenced tourism demand. Interestingly, ADR has increased by 10%, indicating that the impact of the new hotel developments is not that severe.

But, this is not the end of the hotel development cycle. The AC Hotels by Marriott is currently under construction, and is expected to enter the market in the next one to two years with 189 rooms. The other new hotel developments planned include the Onyx Newmark Serviced Apartments, as well as another potential ONOMO property. The extent of the impact of these new hotel developments on the Cape Town market will be dependent upon the recovery of the tourist market after the negative publicity regarding the water crisis.

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