By: Bjorn Hanson, Ph.D., Chairman, Hospitality Industry, Coopers & Lybrand L.L.P.
For this article, Coopers & Lybrand L.L.P. profiles new hotel construction based on data from F.W. Dodge on the top 110 metropolitan statistical areas (MSAs) through the fourth quarter of 1996. Approximately 1,500 projects were reported in the construction pipeline for the top 110 MSAs in the fourth quarter of 1996. This is more than in the fourth quarter of 1995 when F.W. Dodge data revealed approximately 1,250 projects in markets with residential populations over 500,000.
Of the approximately 1,500 projects in the construction pipeline, 800 are in the final planning and start stages, with the remainder in the earlier planning stages. The 800 projects represent over 94,000 rooms currently under construction or will be starting construction within six months. Even though a smaller portion of projects in the earlier planning stages will reach groundbreaking, this data from F.W. Dodge, along with other sources of lodging construction activity, point to the the highest level of construction since 1985 when rooms starts peaked at 156,000.
In 1985 construction was fueled by the widespread availability of capital from savings and loans, foreign capital investment and tax incentives - factors which are not present in the current construction boom.
The rationale for current construction is explained in part by the premium in ADR (average daily room rate) and occupancy levels achieved by new properties over older properties. Coopers & Lybrand research found that new properties achieved premiums as high as 4.8 percent in 1995 and as high as 7.5 percent in 1996. The corresponding occupancy premiums are smaller, an average of 2.3 percent and 1.4 percent, respectively.
Characteristics of New Construction Projects
Of the projects in the final planning and start stages, approximately 80 percent are flagged or branded. The four brands with the most number of rooms in the various stages of construction - Hampton Inn, Extended Stay America, Homestead Village and Courtyard by Marriott - represent approximately 27 percent of the projects in the construction pipeline.
F.W. Dodge data also reveal that the average number of rooms in lodging construction projects has risen to over 100 rooms. Branded projects under construction at the end of 1995 had, on average, 83 rooms. The overall room average is lifted by an increase in the proportion of upscale projects in the construction pipeline at the end of 1996 as compared to 1995. Upscale branded projects - chains such as Marriott, Embassy Suites and Hilton - have a higher average room count at 286 rooms. Construction in the upscale segment has become more attractive due to a number of factors: the closing gap between acquisition and construction costs in the upscale lodging segment (from an estimated 45 percent in 1994 to over 55 percent in 1996); the outpacing of upscale demand growth over upscale supply growth; and strong revenue growth.
The proportion of upscale rooms to all branded rooms in the construction pipeline is growing but remains small proportionally (about 16.5 percent). The bulk of branded construction projects continues to be in the limited-service and midprice full-service segments, where the near parity in building cost and the cost of acquiring limited-service and mid-price full-service hotels continues to drive construction.
Another large portion of new construction, nearly 30 percent, can be found in the extended stay segment. If all extended stay projects are completed, 35,800 new extended stay rooms will come online, a 77 percent increase from end-of-1996 extended stay supply. Interestingly, Residence Inn, which comprises nearly one-third of the existing extended stay rooms, represents only 14 percent of extended stay construction projects.
Top Location for Lodging Construction
Not only is there a concentration of projects in the top brands, there is a concentration in the locations for hotel construction. One-third of all rooms in the construction pipeline are concentrated in just three states: Texas, California and Florida. Each of these states has over 20,000 rooms in hotel construction projects. If casino projects were considered, the state of Nevada would also rank as on of the top states for construction. In Las Vegas alone, 25,600 rooms are expected to open through the year 1999, according to Coopers & Lybrand gaming consulting group.
Construction in Texas is occurring in Dallas, which leads all MSAs with approximately 11,300 rooms in the construction pipeline, and San Antonio with approximately 6,000 rooms. Other leading metropolitan statistical areas (MSAs) for construction are Chicago (9,000), Phoenix (8,800), Atlanta (8.800), San Diego (7,000), Seattle-Everett (6,000), Denver (5,900), Orlando (5,700), Kansas City (5,600), Salt Lake City-Ogden (5,300) and Portland (5,200).
Orlando and Atlanta were among Smith Travel Researchís (STR) top ten markets for lodging construction in 1995, and will continue to see more new supply. Salt Lake City, Portland and Seattle are markets that are relatively new to a listing of top MSAs for new lodging construction. Two cities with a resurgence in lodging construction projects heading into 1997, Chicago and San Diego, were among STRís top ten markets for lodging construction back in 1989.
As was the case a year ago, new lodging construction projects continue to be most active in the limited-service and midprice sector. However, we see some noteworthy trends that will alter the composition of new room starts in the future: lodging construction in the upscale market, the emergence of the extended-stay segment, and lodging construction in metropolitan areas where the lodging market and the economic market are expected to grow.
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