|Portsmouth, N.H. – July 17, 2007 - Lodging Econometrics
(LE), the Global Authority for Hotel Real Estate, in its mid-year report
to the Lodging Industry has just released the highly anticipated Forecast
for New Hotel Openings in 2009. LE predicts that 1,354 new hotels
having 159,368 rooms will open in ’09: a gross growth rate of 3.3% for
that year, likely to net to slightly less than 3% after accounting for
hotel closings and other removals from the industry’s Census.
After reviewing over 4,600 projects in the total current Pipeline directly
with developers and re-verifying Construction Start and Completion Dates
with Brand managers, LE made just minor adjustments to its earlier Forecast
for ’07. Totals are now expected at 1,042 hotels / 100,924 rooms,
representing a 2.2% growth rate for ’07; and 1,200 hotels / 136,692 rooms
with a 2.9% growth rate for ’08.
LE’s president, Patrick Ford, said, “The Pipeline has grown at an accelerated
pace since 2005 and is just now beginning to unfold for the next phase
of the cycle. New Openings in ’07 and ’08 should be comfortably absorbed
now that the economy has again sparked forward, but ’09 will begin to show
wider supply/demand imbalances that will continue into the early years
of the next decade.”
Construction Pipeline at 2Q07 –
Forecast for New Openings
Source: Lodging Econometrics Portsmouth, NH, the
Global Authority for Hotel Real Estate
Supply Increase (%)
Ford continued, “Record breaking industry-wide profitability is expected
into ’09 – but it will be mostly driven by room rates. Barring any
exogenous economic or political event, this cycle peak should be a real
sweet spot for the industry.”
All Pipeline Metrics are at a Cyclical High
“Now that a near-term recession is no longer likely, developers have
turned exuberant once again and are moving at a quick pace. For the
last two quarters the Pipeline has grown at an accelerated pace and stands
at a cyclical high of 4,636 projects / 611,341 rooms. The Pipeline
grew by 643 projects / 81,403 rooms in the first half of ’07 alone, a 15%
increase,” said Ford.
Project migration up the Pipeline has accelerated now that economic
visibility is clearer. Projects Under Construction and those Scheduled
to Start in the Next 12 Months are also at cyclical highs.
Pipeline at 2Q07 by Construction Stage
Source: Lodging Econometrics Portsmouth, NH, the
Global Authority for Hotel Real Estate
|Scheduled Starts, Next 12 Months
|Total Construction Pipeline
Construction Starts for the quarter were 340 projects / 48,837 rooms,
a notable cyclical high. It’s a 41% quarter-over-quarter increase,
accelerating year-over-year trends up to 36%.
New Project Announcements into the Pipeline ballooned to 756 projects
/ 93,777 rooms for the quarter, by far the highest total in this cycle.
The mood is exuberant and the pace of development and franchising has
quickened. Developers feel that the Fed is on the sidelines for a
while and that now is the time to act. Despite recent increases in
long-term interest rates and some tightening in loan covenants this full-employment
economy is being seen as a golden time for lodging development.
The Development Mood is Exuberant Internationally Also
Economic growth and lodging operating yields are robust and lending
conditions are attractive in many developing countries worldwide.
Growth in many emerging economies in Eastern Europe and Asia could even
be termed explosive. The four big public companies – Marriott, Hilton,
Starwood and InterContinental – sense great opportunity for brand distribution
and for growing management and franchise fee income. They are geared
up to expand. They have executive teams in place and their Global
Development Pipelines are expanding rapidly.
Guestroom Demand is the Metric to Watch
During the period of July ’06 through early ’07, economic growth turned
downward causing concern that the economy might slip into recession.
Demand growth was so weak that it could not cover the scant new supply
coming online. Fortunately, the economy rebounded and demand has
“The question moving forward,” said Ford, “is whether there will be
sufficient demand growth to help offset the new supply that is surely coming.
If there is an early disconnect, there could be significant supply/demand
imbalances in many markets, putting pressure on rates that in turn could
impact projected profitability.
Imbalances are already visible in some resort locations. When
the Pipeline begins to unfold this fall, first with smaller mid-market
properties, supply/demand imbalances will initially surface at highway
and outer suburban locations.
Later, in ’08, imbalances are likely to appear in the inner suburbs;
with the larger, higher-priced, select-service type of hotels. ’08 will
begin the influx of new mega casino projects, particularly in Las Vegas.
Finally, in ’09 and into the next decade, there will be a number of
larger mixed-use upper upscale and luxury properties coming online in urban
Caution is the Watch Word for Developers
From day of announcement until opening day, the average 125 room mid
market hotel spends 27 months in the Pipeline while the average 150 room
select service or extended stay hotel spends 33 months. That suggests
that new projects announced this fall will most likely open in 2010 or
2011, the two years projected to have the largest number of New Openings
That means developers should be well informed about market conditions
and proceed with caution. Go/no go investment and development decisions
should only be made after a thorough investigation of planned Pipeline
projects in that particular market. A forecast for New Openings three
years forward should be studied to determine if there’s room for an additional
hotel. An assessment of New Openings for the past two years should
also be made to determine if an absorption problem already exists.
Development conditions seem so favorable, but it’s important to remember
that this development cycle is approaching its peak. A meticulous
review of Pipeline research seems critical to informed decision making.
Private Equity Seeks Lodging Investments
Since May ’06, six publicly traded Lodging REITS have gone private.
345 Hotels / 49,014 rooms have transferred at a value of $6.7 Billion.
Three more REITS, with 172 hotels / 27,626 rooms, are set to close before
The largest private equity groups are now turning their attention to
the Industry’s most prominent publicly traded hotels companies. Blackstone’s
proposed acquisition of Hilton is a capstone transaction valued at $26
Billion, estimated to be $20 Billion in equity and $6 Billion in debt.
It represents a whopping 40% premium for Hilton’s shareholders as valued
by Hilton’s closing price the day before the announcement.
The transaction is significant because it has more of a long term strategic
feel to it. Much of Hilton’s potential will not be available until
well into the next decade.
Little information is available during the quiet period but assuming
the structure is typical for Blackstone – lots of short term borrowing
with a minimum of Blackstone’s own cash – the deal may follow the footprint
established with Sam Zell’s office portfolio.
That might suggest a near term sale of some or all of Hilton’s eight
trophy assets in New York, Hawaii, San Francisco, Chicago, Washington and
New Orleans. Four of those assets are in New York and Hawaii and
are said to represent 17% of Hilton’s total profits.
Blackstone has a number of options available – including a possible
Hilton REIT or Master Limited Partnership – to retain control and the long
term stream of franchise and management fees. Assuming lender covenants
permit and as long as the debt and IPO windows remain open, there’s an
advantage to not acting too quickly. Trophy asset values are expected
to escalate further, well into the next decade.
After that, it’s really a “futures” story for Blackstone. Hilton
has 691 publicly announced New Construction and Reflagging projects with
85,185 rooms in their domestic Pipeline. It’s equivalent to 21% of
their existing Census and represents significant future franchise and management
income. And, their pipeline is still growing. It’s not yet
at its cyclical peak.
Hilton’s international potential is even more long term. The
recent acquisition of Hilton International, allowed Hilton to become a
global company and develop its whole family of brands outside North America
for the first time. Hilton is behind other major companies and is
really just getting started. The international potential for these
world class brands is enormous, but years down the road.
Other synergies available to Blackstone are the possible rebranding
of its LXR world class resorts and other high end hotels in their current
portfolio. Perhaps there might be a different direction for La Quinta
There are other obvious efficiencies to sort out: duplicative
management and development teams, the combining of technology, operating,
marketing, sales and development systems etc…
Another plus. Blackstone has other real estate investment initiatives
underway internationally, particularly in Europe, China, India and Russia.
They now have a stable of high profile international brands available to
work into their planning. This again suggests long term investment
and an extended holding period.
If Blackstone is thinking ahead to the next cycle, Hilton seems the
ideal vehicle to morph Blackstone’s mission into asset managers and committed
long term holders of operating companies with world class brands.
Lodging Econometrics (LE) of Portsmouth, NH is the global authority
for hotel real estate. LE conducts Supply Side research for all markets,
developers, Companies and Brands worldwide including the U.S.; Canada;
Caribbean, Mexico and Central America; South America; Europe; Middle East;
Africa; and Asia. To learn more about LE's products and services or to
inquire about ordering a customized report, please contact LE at (603)
431-8740 ext. 25, or visit them online at www.lodging-econometrics.com.