NC trend: No vacancy

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Walk into 21c Museum Hotel in Durham, and it’s clear this isn’t your grandfather’s Holiday Inn.

Contemporary art collections hang in a former corporate bank boardroom. The old vault is a cocktail lounge. Four-foot fuchsia plastic penguins greet visitors in hallways.

Opened last year, the 125-room, $48 million 21c is just one of the innovative properties that have sprung up during a statewide hotel boom. From the coast to the mountains, developers are building thousands of rooms: A Hotel Indigo planned for Winston-Salem. Two Kimpton Hotels headed for Charlotte’s urban core. A Hilton Garden Inn and AC Hotel landing in Asheville. A Residence Inn coming to downtown Raleigh.

“I think it’s an unprecedented development cycle,” says Tom Murray, chief executive officer of the Charlotte Regional Visitors Authority, which promotes hospitality and tourism.

“We’ve been outpacing the nation in hotel supply and demand,” says Lynn Minges, president and chief executive officer of the N.C. Restaurant and Lodging Association. More than 17,430 hotel rooms, equivalent to 11.5% of the state’s total supply, are either in construction or planning stages, she says. Nationwide, more than 100,000 rooms are scheduled to open this year, according to hotel research company STR.

As of July, occupancy rates, room rates and room demand in North Carolina were performing better than national averages, STR data show, though hotel owners say that House Bill 2, the state’s controversial public-accommodations law that Gov. Pat McCrory signed in March, is blunting tourism and discouraging development.

But is there too much room at the inn already?

In downtown Charlotte, according to Center City Partners, 2,236 hotel rooms are proposed or under construction, which some people in the industry say will result in an oversupply. An Asheville Citizen-Times letter writer complained in June about downtown’s “WalMartization” due to hotel development.

As much as any sector of commercial real-estate development, hotels run in boom and bust cycles. In the mid-2000s, for example, city leaders concluded that Charlotte needed more hotel rooms to attract bigger conventions and sporting events. The city’s economy was flourishing, and people were traveling for work and fun. Then the recession of 2007-09 hit, crippling travel and hotel development, and forcing owners of several Charlotte hotels to restructure their debt under pressure from lenders or, in some cases, lose their properties to foreclosure. No major hotels were started for several years.

The Ballantyne in south Charlotte opened in 2001 and hit a high-water mark in 2007, recalls Joe Hallow, president and chief operating officer of Bissell Hotels. Then, the economy started crumbling with 2009-10 “probably the worst market in 80 years. It really was that bad.” Demand has since returned, and Hallow says 2015 was the 244-room hotel’s best year. “Hospitality is like a faucet. The business is turned on and off rather quickly. Leases are really short in this business.”

In July, N.C. hotel and motel occupancy rose 0.3% compared with a year earlier, performing better than the national occupancy rate, which fell 1%, according to STR. Average daily room rates in North Carolina rose 3.7% compared to a year earlier, on pace with the 3.6% national increase. N.C. room demand rose 2% from the previous year, while it fell an average 0.6% nationally.

Most of the new hotels are limited-service inns, smaller properties that don’t have full room service or meeting rooms. They’re also cheaper and less risky to build, making them attractive to lenders.

Murray of the CRVA said he expects at least one new luxury hotel announcement in Charlotte before the current development cycle ends. Of the rooms under contract now, most are described as upper midscale (think brands such as Hilton, Hyatt and Omni), according to the restaurant and hotel association.

Murray, who once managed development and construction for British lodging giant Intercontinental Hotels Group, says he’s not worried about the hotel boom turning into a bust because developers are better able to forecast demand because of improved, computer-driven analytics. “They’ve got better predictive skills than they used to,” he says, which should limit overbuilding.

The hotel industry is facing fresh competition from home-sharing services such as Airbnb. Travel research firm Phocuswright says one in three leisure travelers in 2015 used private accommodations, up from one in 10 in 2011, and that 31% of travelers who used Airbnb in the last two years were on business trips. Chains such as Indigo and Kimpton, with no two properties alike, are paying attention. Kimpton recently transformed the former R.J. Reynolds Tobacco Co. headquarters in Winston-Salem. 21c is in what once was Central Carolina Bank, which was acquired by SunTrust in 2004. If your hotel room feels more like home in trendy downtowns, it’s probably due to the influence of home sharing.

More worrisome for some is HB2. Minges and Murray downplay the bill’s influence on long-term hotel development, saying they believe investors view the bill as a short-term road bump. STR says its data is recent since the law took effect in March and was revised in June.

But the leaders of Durham’s 21c emphatically say HB2 is the biggest challenge for the state’s lodging industry. The bill requires a person to use the bathroom associated with the gender on their birth certificate and nullifies ordinances in cities that expand protections for the LGBT community.

Kentucky art collector Steve Wilson and his artist wife, Laura Lee Brown, heir to the Jack Daniel’s fortune, developed the first 21c hotel with the goal of revitalizing downtown Louisville, Ky., by making thought-provoking contemporary art accessible to the public. They’ve opened five others, including one in downtown Durham where single-stall bathrooms have gender-neutral signs labeled “We don’t care.”

“That law is an offensive turnoff,” 21c Museum Hotels President Craig Greenberg wrote in an email, “and one result of this law is that people who are making leisure and business travel plans choose to travel elsewhere. Millions of dollars aren’t being spent in North Carolina because of this misguided law. The best thing for the state’s hospitality industry — and its economy at large — would be a full repeal and denunciation of House Bill 2.”

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