Nashville's hotel fever: How many is too many?

Nashville investor Mack McClung turned his attention to hotels three years ago.

The sector was booming. Investment was pouring in from around the world to cater to vacationers attracted by the popular "Nashville" TV series and the city's music and nightlife scenes.

From 2015 to 2016, 20 new hotels opened in the greater Nashville area. The pace ticked up in 2017, with 19 new properties added. Last year, 20 more hotels opened.

At least 20 new hotels are projected to open this year, according to industry analyst STR.

The rapid influx of new properties has triggered signs of market saturation. But investors remain bullish.

"We're building more rooms than we're selling. I would expect that exact pattern to happen this year," said STR Senior Vice President Jan Freitag. "But demand growth is tremendous."

McClung's Vastland Companies specializes in developing residential communities, offices and shopping centers. They debuted their first hotel in mid-January.

The 16-room Studio 154 features arched windows and pop art fixtures in an 1890-era Victorian brick building shared with Dick's Last Resort and Coyote Ugly.

"We realized there is probably a market downtown for something a little more unique," McClung said. "Not everyone wants to stay at a Hilton or Marriott."

Airbnb-style rentals proliferating

Nearly 6,000 new rooms have been added to the greater Nashville market since 2016, according to STR.

On top of that, more than 6,000 short-term vacation rentals were permitted at apartment complexes and homes throughout the area, to attract users of Airbnb.com, VRBO.com and similar sites.

The deluge finally absorbed record levels of demand that has spiked hotel rates year-after-year since 2013, putting prices on par with rooms in New York City and London. The rate of rooms occupied dropped by 1 percent in both 2017 and 2018, after years of increases.

But investors aren't fazed. Hotel owners still filled nearly eight of 10 rooms every day in 2018, and room prices increased overall – but at a slower pace than in prior years.

Like McClung, investor Mark Bloom sees success in bringing an upscale, creatively designed hotel to the market.

He's part of a team building the 16-story W Hotel at 12th Avenue South and Pine Street in the trendy Gulch neighborhood, where a massive hole is now filled with construction activity.

"There is going to be a point in time where there is a slowdown. We all know that. I don't know if it's a year, five or 10 years from now," Bloom said. "Our brand that we’re building, a high-end lifestyle property and our location will help us in more challenging times."

Room rates rising

The average room price in 2018 was $147.19 a night – up from $142.64 last year, according to STR. Rooms downtown start closer to $300 a night on weekends.

Confidence in the industry is rooted in the city's incredible tourism growth, which has nearly doubled from 8.5 million visitors in 2008.

In 2017, 14.5 million vacationers arrived. That grew to 15.2 million tourists last year, according to the Nashville Convention and Visitors Corp.

Now, hotel owners expect another major influx of weary travelers to keep those numbers strong.

Amazon and finance companies AllianceBernstein and EY are in the process of opening major offices downtown, promising to draw new corporate travelers. That will add to growth in leisure and group meeting travel segments.

"That's what I would call a trifecta of demand," said Scott Smith, managing director of industry analyst CBRE Hotels. "All the hotels are maximizing their occupancy with this strong growth rate from each segment."

'The numbers are promising'

Competition from short-term vacation rental properties promises to keep things interesting in the hotel industry.

The rentals have ballooned quickly, with new permits growing by double-digit percentages each year since 2015.

Several downtown apartment buildings have partially or wholly converted to vacation rentals, including City View, the Dallas on Elliston, the 505, the Olmsted, 506 Lofts, and The James.

Now, new buildings are being constructed solely for short-term rentals.

"It's still a growing and dynamic market," Smith said. "Nashville has become a huge bachelorette party destination, and they're getting Airbnb rentals with several bedrooms and a kitchen. That is impacting the hotels.

"There will be a slowdown. I don't think it's going to be anytime soon unless there's a recession."

During the city's New Year's Eve celebration, 17 percent of visitors surveyed by the Nashville Convention & Visitor's Corp. said they stayed in short-term rentals and 65 percent reported hotel reservations.

McClung's Studio 154 caters to the demographic with loft-style suites for up to 12 guests.

He's relying on his property's unique characteristics to continue to attract guests if an economic downturn comes.

"We use Hotels.com, Bookings.com, Kayak.com, Airbnb...," McClung said. "The numbers are promising. The question becomes when are the tourists going to stop increasing. You have to have a unique niche in the market."

He's now considering developing more hotels.

Sandy Mazza can be reached via email at smazza@tennessean.com, by calling 615-726-5962, or on Twitter @SandyMazza.

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