Anchorage lodging market continues to expand

Brent McKim

The Anchorage lodging market consists of about 8,200 rooms and is a major contributor to the local economy. Roughly 1,800 of these rooms have been added since 2000, an impressive annual expansion rate of 140 rooms, or roughly one new hotel every year. Lodging remains a strong component of our commercial real estate market.

The national recession had a major effect on the Anchorage market. The best indicator of total lodging demand is municipal bed tax data. Since 1978, total market revenue has increased at an impressive rate of 6.4 percent annually. Because of the national recession, total market revenue decreased by 15 percent in 2009, the largest contraction in the market's history. As a result, until recently, growth was limited. In 2012, only the 92-room Aspen Suites was added.

But Anchorage lodging demand has bounced back and is at record levels. The market has recovered all the 2009 losses, with revenue growth of 9.4 percent in 2010, 5.8 percent in 2011 and 5.7 percent in 2012. By comparison, 2013 revenue growth of only 1.7 percent appears sluggish. But this figure doesn't tell the entire story.

Anchorage lodging supply -- as measured by the number of rooms -- has contracted in recent years. On the surface, this seems unlikely and contrary to typical market behavior. Nonetheless, according to the city's bed tax data, total market inventory peaked in 2010 at 8,593 rooms. In 2013, inventory was 8,124 rooms, a reduction of 469.

The first cause of this decrease is a shift in guest preference from traditional hotel rooms to suites with kitchens. As a result, some operators of older properties with excess capacity have converted two or more smaller rooms into larger suites.

The second cause is the conversion of hotel rooms into monthly rentals. A combination of increased competition from newer "product" and less tourism in winter has placed downward pressure on rents for older, significantly depreciated lodging properties.

At the same time, the multifamily market, in particular the low-income housing segment, has been very tight, pushing rents higher. As a result, some lodging properties have been fully converted to apartments while others have operated as hybrids, pursuing monthly rentals during winter and nightly rentals during summer.

Increasing demand and decreasing supply are good for business. The most common measure of performance in the lodging industry is Revenue Per Available Room, or RevPAR, calculated by dividing revenue by inventory.

Since 2001, bed tax data indicates RevPAR has increased at an average annual rate of 1.9 percent. Since 2009 revenue has increased and inventory has decreased, resulting in RevPAR gains of 4.0 percent in 2013 -- double the historic average annual growth rate. Thus, in terms of performance, 2013 is a very strong year.

Strong business performance tends to attract competition. In Anchorage, the recent trend is new competition from national developers and investors.

Stonebridge Companies, a major national development and management company, is in the process of constructing a 121-room TownePlace Suites by Marriott to the south of the newer Embassy Suites hotel in Midtown. This is not Stonebridge's first project; it also developed the Embassy Suites, Hilton Garden Inn, Hampton Inn and Homewood Suites.

All but one of its developments were purchased by national Real Estate Investment Trusts (REITs) like Apple or Blackstone.

Affinity Hospitality LLC, another major national development company, is about to break ground on a 135-room Home2 Suites by Hilton south of the Golden Corral restaurant on C Street in Midtown.

These two properties demonstrate the hottest trends in the hospitality industry. They are both extended-stay accommodations with studio, one or two bedrooms, full kitchen, technology-laden suites with fitness and business centers, pools, free breakfast and meeting rooms. And, most notably for Alaskans, they are "pet friendly."

While it won't open until mid-2016, the Alaska Native Tribal Health Consortium plans to develop a 170-room, six-floor hotel on the Alaska Native Medical Center campus for hospital patients and families. There are also rumors of a boutique hotel planned in downtown Anchorage.

While they have sometimes been "uneducated" on Alaska, Real Estate Investment Trusts and national hospitality developers have and will continue to play an important role in Anchorage.

"Anchorage was not our first choice to come to," said developer Steve Hall with Affinity Hospitality LLC. "We were pushed to come up here by our REIT clients, but after researching the market for several years we determined it to be attractive, strong and growing with significant demand from both business and tourism."

The Dow Jones Hotel & Lodging REITs Index was at roughly $20 a share in 2009. Recently it was above $115 a share. Because the Internal Revenue Service requires REITs to pay at least 90 percent of their income as dividends, they tend to be hungry for new investment opportunities. Both TownePlace and Home2 will likely be acquired by REITs.

The industry outlook remains favorable. Since 2009, including Home2 and Towneplace Suites, 343 rooms will have been added here, an expansion averaging 86 rooms annually, well below the historic average of 140 rooms annually since 2000. This suggests there is nothing unusual about the number of rooms coming online, so barring a major economic shift, the market should continue to see healthy increases in RevPAR.

As always, however, we will await the arrival the cruise ship passengers this summer to make a final assessment of the 2014 lodging market. You can help the cause by inviting friends and family to visit and making them stay in a hotel once they arrive. In most cases, they'll probably be more comfortable.

Per E. Bjorn-Roli is a managing member of Reliant LLC, an Alaska commercial real estate appraisal and advisory firm he founded in 2003. He holds the Appraisal Institute's prestigious MAI designation, is a past president of the Alaska chapter and is a state certified general appraiser.