Hotel Online  Special Report


advertisements
..
..
Hotel Construction Signs Along the Road to Recovery; Measuring Hotel Developer Intent

.

By R. Mark Woodworth and Robert Mandelbaum, January 2005

Introduction

The economic and political events of 2001 through 2003 effectively brought new hotel construction to a trickle. During the late 1990s, construction activity added approximately 150,000 rooms per year to the U.S. inventory. The current annual rate of inventory increase equals about 75,000 rooms. As these numbers indicate, hotel developers are patiently waiting for conditions to once again justify normal levels construction. Hotel firms now find that property values in many markets are approaching replacement cost, and that the time for new lodging development may be here today.

Both service providers that track lodging industry construction, Smith Travel Research / PPR / FW Dodge and Lodging Econometrics, report increased levels of development activity during the first half of 2004. This news, in view of our own long-held expectations that industry fundamentals will continue to result in strong increases in operating incomes, portends an expectation of significant hotel construction in the years ahead.

Given significant levels of pent up �developer demand�, combined with an abundance of capital looking to flow into lodging, we asked ourselves the following questions:

  • Where does hotel developer interest lie?
  • How does the current hotel development pipeline relate to expected future market conditions? 
How Far Along Is The Development Pipeline?

To determine how significant the current hotel development pipeline is, we first rely on the Summer 2004 Hotel Outlook lodging forecasts prepared by the Hospitality Research Group of PKF Consulting (HRG) and Torto Wheaton Research (TWR). Hotel Outlook forecasts contain econometrically developed estimates of the level of new supply that are likely to be built given both historical trends and expected economic conditions in each of 50 major lodging markets around the U.S.  Then, we perform a comparative analysis of these supply forecasts to future construction information published by Smith Travel Research /PPR / FW Dodge in their Lodging Supply Report. The differences between the two sets of numbers indicate just how far along the hotel development pipeline is relative to the expected eventual build-out of hotels.

How the Econometric Forecasts are Developed 

The multi-equation model explicitly designed by HRG/TWR to forecast national and metropolitan lodging market activity consists of three forecasting equations.  These are:

  1. Demand - the number of rooms sold. 
  2. Completions - the change in the number of rooms available. 
  3. Real average daily room rates 
Using this system of equations with the historical lodging market data series from Smith Travel Research and forecast economic series from Economy.com, lodging market forecasts are developed. 

Supply and Demand Analysis

Because all lodging markets, like politics, are local, ten of the larger metropolitan lodging markets in the U.S. were selected for the comparative analysis.  A list of these markets, along with their total supply and average annual supply growth levels from 1987 through 2003, appears in Exhibit 1. 
.

Exhibit 1: Supply Information For Selected Markets
This exhibits lists changes in supply and standard deviations by metropolitan market from 1987 through 2003.
Market Total Change
In Supply
Average Annual
Change In
Supply
Standard
Deviation
Atlanta 102.1% 4.6% 4.2%
Chicago 97.8 4.4 2.8
Dallas 82.7 3.9 4.5
Houston 72.0 3.5 3.4
Los Angeles 54.1 2.8 3.1
Miami 59.2 3.0 2.9
Orlando 85.6 4.0 3.5
Philadelphia 129.3 5.4 4.2
Phoenix 115.0 5.0 4.7
Washington, DC 54.2 2.8 2.0
       
Top 50 U.S. Markets 78.5% 3.7% 2.2%
Sources: HRG, Smith Travel Research      
.
The Comparative Analysis

As an initial step in the comparative analysis, the supply and demand data are added to produce the cumulative number of rooms placed in service during the years 2004 through 2009.  Then, several ratios and statistics are calculated to provide an understanding of relations between future supply and demand, as well as between modeled and pipeline supply additions. The following ratios provide insights into the pipeline status for each market.

1. Pipeline Supply Divided by Modeled Supply � This ratio compares the number of rooms that are currently in the construction pipeline to the number of rooms likely to be built by 2009.  A relatively low ratio for a market indicates that compared to other markets, the pipeline activity for the subject market is less far along towards reaching its expected levels of future supply additions.

2. Pipeline Supply Divided by Modeled Demand - This ratio compares the number of rooms that are currently in the construction pipeline to the change in the number of rooms that are projected to be occupied.  A relatively low ratio for a market indicates that, compared to other markets, the pipeline for the subject market is less far along towards accommodating its projected new demand.

Exhibit 2 presents the profiles for future demand and supply relations within the ten metropolitan markets selected for this study. Note that all of these percent changes and ratios are derived from cumulative totals of the future demand and supply measures for the period 2004 through 2009. The summary statistics presented in Exhibit 2 tell several interesting stories. First, the modeled demand estimates indicate that all of these markets will experience comparable demand growth over the next five years, and as a textbook would say, comparable supply growth will occur at a slower pace during the same period due to delivery lag. Second, supply growth from the current pipeline appears well behind the speed of both modeled demand and modeled supply in all ten markets. Finally, and most importantly, both of the ratios including pipeline supply punctuate that actual supply (as of the summer of 2004) is well behind the pace of what the model says will likely be built on the supply side of these markets during the next five years.

.
Exhibit 2: Profiles of Future Lodging Market Development
This table shows three columns with percentage change in alternative projections of demand and supply and two columns of ratios using pipeline supply, modeled supply, and modeled demand.

Percent Change Modeled
Demand
Percent Change Modeled
Supply
Percent Change Pipeline
Supply
Ratio Pipeline Supply
To Modeled Supply
Ratio Pipeline Supply
To Modeled Demand
US. Lodging
Market
2004 - 2009 2004 - 2009 2004 - 2009 2004 - 2009 2004 - 2009
Atlanta 36.4% 18.9% 3.5% 18.7% 17.1%
Chicago 26.0 14.8 5.1 34.7 32.1
Dallas 35.2 15.1 4.2 28.1 22.6
Houston 35.3 24.1 4.8 19.9 23.9
Los Angeles 21.7 16.9 3.3 19.4 22.0
Miami 28.6 13.9 7.9 57.1 42.5
Orlando 35.7 20.0 4.7 23.4 21.4
Philadelphia 24.5 18.8 5.5 29.1 34.3
Phoenix 24.8 14.8 5.5 37.5 37.1
Washington, DC 29.7 20.7 8.1 39.3 40.7
Sources: Smith Travel Research / PPR/ FW Dodge, HRG, TWR          
.
Ranking and Scoring using the Ratios

The relative pipeline status of the ten markets is found by scoring the markets on a one-to-ten scale. A value of �one� (�ten�) is assigned to the metropolitan market with the lowest (highest) ratio in each of the two categories. The market with the lowest cumulative score is the market where current construction activity lags the most relative to what the future construction activity is most likely to be during the next five years. As shown in Exhibit 3, Atlanta, with the lowest combined ratio score, is exhibiting the greatest current lag in hotel development activity relative to the other nine markets. On the other hand, the Miami market achieved the highest score and therefore has the most advanced construction pipeline of these ten markets.
.

Exhibit 3: HRG Market Development Score
 
This exhibits lists scores based on rankings using ratios of pipeline supply to modeled supply and demand
   
Hotel 
Market
HRG Market
Development Score
Atlanta 2
Los Angeles 5
Orlando 6
Houston 8
Dallas 9
Chicago 13
Philadelphia 13
Phoenix 16
Washington, DC 18
Miami 20
Source: Smith Travel Research / PPR / FW Dodge, HRG  
.

What Does This Mean?

Given the magnitude of the lag between pipeline activity and the expected build out of hotels, it is apparent that the current pace of hotel development activity will not saturate these cities in the near term.  While our analysis was conducted solely for 10 markets, we believe that the findings can be applied to most major cities across the U.S.  This diminished level of potential overbuilding in the near term should contribute to downward pressure on hotel capitalization rates, which in turn will serve to further enhance property values.

R. Mark Woodworth is Executive Managing Director of the Hospitality Research Group of PKF Consulting.  Robert Mandelbaum is the Director of Research Information Services for the Hospitality Research Group of PKF Consulting.  Both work in the firm�s Atlanta office.

To view a sample HRG/TWR Hotel Outlook report and the supply growth forecast contained therein, visit www.pkfonline.com/samples/HOsample.pdf .


 
 
Contact:

Robert Mandelbaum
Director of Research Information Services
PKF Hospitality Research
3340 Peachtree Road, Suite 580
Atlanta, GA  30326
Phone: (404) 842-1150, ext 223
Fax: (404) 842-1165
E-Mail: [email protected]
www.pkfc.com

Also See: Understanding the Recovery Occurring in the Meeting�s Market; Surveying the Meeting Planners / Robert Mandelbaum / December 2004
First Half 2004 Hotel Profits Solidify 2005 Outlook; Industry Still Lags Far Behind its Past Peak Performance in 1998 / HRG & PKF Consulting / December 2004
Room Rates Across the Top 50 Hotel Markets in the U.S. Will Increase by 3.7% in 2004; Five Highest and Five Lowest Average Daily Room Rate Hotel Markets in 2005 / December 2004
Perspectives on the Road to Recovery - U.S. Lodging Industry 2005 / HRG & PKF Consulting / November 2004
Other Revenue Is Good Revenue / Robert Mandelbaum / November 2004
Uncanny! Hotel Occupancies �Key Indicator� of Presidential Election Outcome / October 2004
Is the Hotel Industry Smart Enough to Avoid Overbuilding; Ten Reasons Why Real Estate Markets Become Overbuilt / Jack B. Corgel / July 2004
PKF Consulting/HRG Survey Forecasts Banner Year for Hotel Transactions; Investors Favoring the Full-service Segment / May 2004
First Uptick for Hotel Industry in Three Years; Full-Service Hotels Lead the Way In U.S. Hotel Profits for 2004 / Hospitality Research Group / March 2004
Demand in the Full-service Hotel Sector is Expected to Increase by 6.3% in 2004; Best and Worst Hotel Markets in Terms of RevPAR Growth / PKF Consulting / January 2004


To search Hotel Online data base of News and Trends Go to Hotel.Online Search

Home | Welcome! | Hospitality News | Classifieds | Catalogs & Pricing | Viewpoint Forum | Ideas/Trends
Please contact Hotel.Online with your comments and suggestions.