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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:
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:
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.
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. |
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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 |
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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.
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
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