At the end of Q3 2008, the Total Construction Pipeline stood at 5,652 projects and 740,272 rooms, down 4% and 6% respectively quarter-over-quarter (QoQ).  It�s the first quarterly decline in five years. Fall-offs are expected to continue into early next decade.

While declines were modest in the Under Construction and Early Planning stages, they were down significantly in Scheduled Starts in the Next 12 Months. 213 projects actually migrated backwards into Early Planning, a sure indicator that the credit crisis and softening lodging operating statistics, both of which have worsened materially in the last 90 days, are having an adverse impact on developer thinking.

Key Pipeline Metrics

Other metrics within the Pipeline underscore developer concerns. Construction Starts in Q3 were down for the second quarter in a row to 403 projects/44,477 rooms. The room count was down 7,387 rooms or 14% from the cyclical peak recorded in Q1 2008. Construction Starts are expected to continue declining for the foreseeable future.

Cancellations/Postponements of projects already in the Pipeline increased for the third consecutive quarter and stand at 360 projects/58,949 rooms. Although up in all chain scales, the highest proportion of cancellations were for non-branded, independent projects larger than 200 rooms.

New Project Announcements (NPAs) into the Pipeline are off significantly at 429 projects/46,221 rooms. Project counts are down 51% and guestrooms are down 63% from the peaks established in Q1. Only 4% of NPA�s in Q3 are larger than 200 rooms. If the last recession is a guide, New Project Announcements are likely to drift below 30,000 rooms per quarter early next year.
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Markets that were the fastest growth areas throughout the decade have the largest Pipelines today. New York, Phoenix, San Antonio, Houston, Washington, and Philadelphia have Pipeline counts that are 20% or more than their current guest room census counts.

Other markets are important to monitor as well. Atlanta, with 129 projects in the Pipeline, and Dallas, with 116, will add significantly to their Current Census as early as 2009. Chicago, with 16,896 guestrooms in the Pipeline, and Orlando, with 15,375 rooms, also have strong Pipelines, but they won�t start to unfold until late 2010.

Leading Companies & Brands

Three of the leading Hotel Companies, Marriott, Hilton and InterContinental, have Development Pipelines � including both New Construction and Conversions � in excess of 100,000 rooms each. In order, Choice, Starwood and Best Western follow thereafter.

InterContinental has the largest roster of projects in the Pipeline. At 1,244 projects, they are the only company with over a 1,000 projects under development. Activity is primarily driven by its mid-market brands: Holiday Inn, Holiday Inn Express and Candlewood Suites. Choice Hotels has the largest number of conversions at 243 projects, mostly for its Comfort Inn and Suites brand.

LE�s Three-Year Forecast for New Hotel Openings

Projects Under Construction peaked in Q2. Having fallen slightly to 1,716 projects/233,407 rooms, Q3 is the fifth quarter in a row where the room count has exceeded 200,000 rooms.  Consequently, LE�s Forecast for New Hotel Openings at Q3 has been revised only minimally. It stands at 1,213 hotels/135,070 rooms, with a 2.8% gross growth rate for 2008. In 2009, the Forecast calls for 1,436 new hotels/158,851 rooms, a 3.3% growth rate. 2010 will see New Openings of 1,389 hotels/158,889 rooms and a 3.2% growth rate. Net growth rates will end approximately ±.2% lower after hotel closings and other removals from the current Census are compiled.
 
If Casino rooms are removed from the Forecast, New Hotel Openings in 2010 actually shows a modest YoY decline of 3,025 rooms or 2%.

When considering that 233,407 rooms are already in the ground, and even after accounting for a rapid deceleration in future Construction Starts, these forecasts are still near certain to occur. Importantly, these New Opening counts will be at levels below the peaks for New Supply set in previous cycles, which could indicate a quick rekindling of developer activity once the lending crisis is over and the economic recovery gets underway.

LE�s Transaction Trends

Just as the financing crisis has impacted development activity, it has also seriously affected transactions. The volume of Individual Hotel Transactions peaked in 2006 at 1,636. For the first three quarters of 2008, 668 transactions were closed, down 48% from Q1-Q3 2006. 

The Average Selling Price Per Room (ASPR) for transactions involving properties larger than 200 rooms topped out in 2007 at $167,198. In 2008, ASPR for these properties is down 31% from 2007�s peak and is at $115,030 per room. The ASPR for properties that are 200 rooms or less is down 10% from the 2007 peak to $73,793 in 2008.

Financing has all but closed down for Individual Transactions larger than 200 rooms. Only some smaller, branded, upscale and mid-market projects are getting financed in this climate, mostly through smaller community banks. Even though prices are declining, fewer buyers are active as greater investor equity participation is required, interest rates are drifting higher and other terms are tightening.
LE expects transaction volume and selling prices to decline further well into next year, as investors wait for a more opportune time to enter the market.  Before investors return in earnest, the lending crisis will first have to right itself, economic visibility will need to be much clearer and operating fundamentals will need to approach bottom.

Then, what is likely to occur first are a series of forced hotel sales. Some will be due to the inability to refinance. Others will be adversely impacted by age or by new competitive pressures from New Supply coming online.

Some consolidation is ahead. M&A and portfolio sales that will realign the industry are likely to take place after the credit crisis winds down and, perhaps, before the economic or lodging turnaround has commenced.  

Attractive investment opportunities could be available by mid-2009. Those with cash reserves, strong balance sheets and credit worthiness will be best prepared for the opportunities that will arise.

Kathleen Hurley
Lodging Econometrics
Ph: +1 603-431-8740 ext. 12
Email: [email protected]