Rising Demand, Falling Occupancy

Rising Demand, Falling Occupancy

After a big influx of hotel rooms in downtown Minneapolis, bookings are up, but many rooms still sit empty.

The hotel building boom in downtown Minneapolis has resulted in falling hotel occupancies for the first half of this year. “Supply right now exceeds demand, even though demand is still growing,” says Kevin Hanstad, director of market research and public policy for Meet Minneapolis, the city’s convention and visitors association.

In just 12 months, 1,142 hotel rooms were added to the market in downtown Minneapolis and the University of Minnesota area, boosting inventory 15 percent to 8,549 rooms. “For a while, our occupancy will be declining as we absorb that new inventory,” Hanstad tells TCB.

For January through June, the occupancy rate was 66.1 percent, down 6.5 percentage points from the 2016 period. But the gap was much smaller in June, when occupancy hit 79 percent or just 2 points below June 2016.

Occupancy rates vary greatly in downtown Minneapolis, rising substantially in the summer months. However, data collected for Meet Minneapolis shows that demand is adapting to the new supply as the number of rooms occupied rises year over year each month. For example, total room nights were 203,039 in June compared with 179,173 in June 2016.

Hanstad says hotel managers are concerned about the slide in occupancy, but “not distressed.”

Brent Foerster, senior vice president of destination sales for Meet Minneapolis, says a pattern has emerged: “[Existing hotels] closer to new hotels and with a primary target market of business and leisure travel are seeing the largest year-over-year occupancy declines.”

Greater competition is affecting what customers are paying for hotel rooms. For the January to June period, the average daily rate dropped 2.4 percent, to $145.24, compared with the previous year. Revenue per available room—which reflects the lower occupancy rate—had a steeper drop of 8.7 percent, to $95.99.

Meet Minneapolis increased its sales staff three years ago to bolster market demand for hotel rooms, including targeted marketing for sports and religious events and short-term small meetings. Foerster says those efforts are paying off, because demand for guest rooms in the city is up 8.1 percent—much higher than the national average of 2.5 percent.

“Our sales and marketing efforts most affect the group and leisure markets,” Foerster says. “They do not have much direct effect on the business travel market, which represents about 40 to 50 percent of hotel room nights in the city.” —Liz Fedor