Tucson hotels to tap brakes after accelerated growth

Reprinted from Hotel Business: BY ADAM PERKOWSKY ON APRIL 7, 2020

Downtown Tucson has seen a revitalization.

TUCSON, AZ—Over the last four years, this city has ranked first in average compound annual occupancy, ADR and RevPAR change among the 60 U.S. markets covered by CBRE’s Hotel Horizons, according to Branden T. White, senior consultant in the Western Division of CBRE Hotels Advisory.

“Overall economic trends for Tucson have been positive in recent years, with accelerating job growth, rising incomes and migration to the area specifically for jobs,” noted White. “Positive economic conditions and well-received new and renovated hotel product have driven significant growth in the lodging market. Travel across all segments has been healthy.”

According to CBRE’s Hotel Horizons, Tucson hotels finished the year with a RevPAR gain of 6.9% in 2019. This was the result of an increase in occupancy of 3.8% and a 2.9% gain in ADR. The 6.9% boost in Tucson RevPAR was better than the national average of 0.9%. In fact, Tucson’s RevPAR increases have been 6% or greater for each year since 2015, with a high of 12.9% in 2017.

Home to the University of Arizona and nearly year-round sunshine, Tucson was the first city to be recognized as a UNESCO City of Gastronomy in the U.S., according to Cindy Aguilar, Visit Tucson’s PR/communications manager.

“This distinction recognizes our long-standing culinary and agricultural heritage, with more than 4,000 years of consecutive history of food being grown here, and some of those ingredients still appearing on Tucson menus,” she said.

It also has much to offer hotel developers, as well as travelers, including a revitalized downtown area and a $65-million expansion/renovation of the Tucson Convention Center.

“Tucson has become increasingly attractive to developers across all commercial real estate segments that are looking to secondary markets and cost-efficient areas to build,” said White. “The low cost of living and access to a highly skilled workforce are also significant positive factors.”

Bryan Tubaugh, EVP of locally based Focus Hospitality Management, whose seven-hotel portfolio is located solely in this city, pointed to the major companies setting up shop in Tucson as drivers for the hotel industry.

“Tucson still has a lot of room for growth and continues to welcome big businesses to the city such as Geico, Amazon, Caterpillar, Hexagon Mining and others,” he said. “Adding these large corporations creates jobs and demand within the market. The cost of development is still reasonable as well, and there are a lot of key locations within the city to be developed.”

Tubaugh noted that Tucson is known as a resort town “with some of the most beautiful resorts in the U.S.,” adding, “However, I do believe the boutique, upper-midscale property is what thrives the most in our city. We’ve seen great success with our Hamptons as we continue to drive rate and occupancy. The AC Hotel by Marriott Tucson Downtown [which Focus does not manage]has proven that the boutique brands are what our business traveler wants.”

According to Aguilar, citing STR figures, there are 151 hotels in the Tucson region with 15,366 rooms.

Among the projects in the pipeline are a DoubleTree by Hilton located in the south parking lot of the convention center, expected to open by the end of 2020; Tucson’s first dual-branded Hilton—a Home2 Suites and Hampton Inn—set to open in December; the mixed-use Graduate Hotel & The Collective Apartments at Main Gate, with a projected completion set for July; and The Tuxon Hotel, an independent boutique property in West Downtown set to open this summer. However, plans can change if construction is slowed due to the COVID-19 pandemic.

Still, Tucson is not without its challenges. Like other cities throughout the country and globally, the effect the pandemic will have on the hotel industry is currently unknown. White also pointed to a tightening labor market that will continue to place upward pressure on wages, which will present challenges for some hoteliers as their ability to control costs will be tested, and rising construction costs.

“Another challenge within the broader commercial real estate market is achieving rental rates necessary to meet rising construction costs,” said White. “Tucson’s dependence on government spending was a key contributor to its slower recovery from the 2008 financial crisis relative to the state and the nation; however, the continued diversification of its economy will better position Tucson over the long term.”

Tubaugh, who had a positive outlook for 2020 going into the year, pointed to the pandemic as something that will change the course of the industry here.

“Earlier this year, I would have projected a strong ADR and a slight dip in occupancy due to the additional supply coming to the market,” he said. “However, just like the rest of the industry, we don’t know the degree to which the COVID-19 outbreak will impact future business just yet. We’ve been in constant contact with our owners and plan to continue to work closely with them as we all do our best to get through this difficult time.”

Before the COVID-19 pandemic, CBRE predicted that by the end of 2020, the Tucson market would see a decrease in occupancy (-1.3%), yet it would still see growth in ADR (3.5%) and RevPAR (2.2%), albeit at lesser increases than recent years.

“After many years of tepid supply growth, the annual change in supply began outpacing demand during 2019, and we projected supply growth to peak in 2020,” said White.

How the coronavirus crisis will affect Tucson long term—as with the rest of the industry—is yet to be determined. HB