Hotel Online  Special Report


 The Lodging Development Pipeline is Rapidly Accelerating; 
Construction Pipeline Grows to 3,067 Projects
Having 415,977 rooms
LE Increases its Supply Side Forecast for '06 and '07 Once Again
PORTSMOUTH, NH – January 23, 2006 - Lodging Econometrics (LE) in its 2006 report to the Lodging Industry, reported that the Construction Pipeline has grown to 3,067 projects having 415,977 rooms. 

Patrick Ford, President, said,  “It’s the highest Pipeline total since 2000 and is growing at a rapid pace as 553 New Projects with 71,177 rooms were announced into the Pipeline in 4Q05, the largest of eight consecutive quarterly increases since the ’03 bottom.”   

Ford noted that developer confidence is buoyed by the very strong recovery in lodging operations.  With sentiment growing that rising interest rates will peak in 1H06, lodging developers are shaking off any hesitancy about rising labor and material costs so prevalent in the post-Katrina period.  LE expects the Pipeline to continue to grow through the end of the decade, surpassing the record totals set in ’98, perhaps as early as next year.  
Select Service and Midscale Brands Predominate 

“Since we’re only in the third year of a new development cycle, it’s smaller projects in secondary and tertiary markets and in the outer suburbs of larger cities that predominate.  These projects are generally less than 200 rooms in size and up to 95% of them will eventually carry a brand,” said Ford. 

Pipeline project counts for Midscale w/o F&B Brands increased 36% Year-over-Year (YoY) in ’05 to 1,181 projects/101,690 rooms while Upscale, Select Service projects increased 35% to 567 projects/67,556 rooms. 

The Independent segment is burgeoning as well, since it serves as a “parking lot” for actively pursued projects by developers who have not as yet chosen a brand.  When a decision is reached, the project will then be transferred to the appropriate chain scale.  Branded projects in these two chain scales move quickly through the Pipeline as they average a relatively brief 20-24 months from their date of announcement until their completion date.

As a result, projects presently Under Construction have quickly accelerated to 895 projects/120,945 rooms. “These are the highest Under Construction counts since 1Q01 and are 20% higher than what third-party providers and other analysts are reporting. These high project counts are a direct result of the fast-paced activity of major franchise sales teams who are writing agreements at near record-breaking levels in many companies.  It’s a remarkable feat so early in an operating recovery.” said Ford. 
LE Increases its Supply Side Forecast 

Increased development activity has caused LE to increase its Supply Side Forecast for ’06 to 874 hotels/91,667 rooms, a gross growth rate of 2% before accounting for hotel closings and conversion of existing guestrooms to alternate use. 

Pipeline Projects Scheduled to Start Construction in the Next 12 Months have already reached an all-time record high with 1,471 projects/187,189 rooms.  These projects will come on-line in ’07 and ’08.  Accordingly, LE also increased its forecast for New Openings in ’07 to 1,113 hotels/117,773 rooms – a 2.5 % gross growth rate.   

In both ’06 and ’07 lodging demand growth should still exceed supply growth, after future removals from guestroom inventory are factored in.  That’s another clear indicator for growing pricing power and record setting profitability over the next few years.   
Mixed-Use Hotels Are Critical to Upscale Development 

Lodging developers in high density Central Business Districts (CBD’s) and in popular resort destinations along both coasts are in many cases benefiting from the boom in residential real estate and the consumers’ desire for a second home in important vacation destinations.  Because interest rates for consumer borrowing have been so low, lodging developers of larger projects are surprisingly active today, but have a different business model.  Developers are accessing other people’s money and their borrowing power by configuring hotel projects with Private Residences or by pre-selling all or a portion of their guestrooms as Condo Hotel or Timeshare Units which provides a large upfront cash infusion for developers.  These development concepts are permitting construction of larger sized projects in CBD’s and destination resort areas early in this recovery that might not otherwise have taken place.   

The advantage to the developer is that it requires far less of his own equity.  It’s attractive to the lender because the take-out loan is often less than normal.  The consumer benefits too.  Residential living is enhanced by the services that a hotel can provide while in resort locations, it’s the purchase of a long-term repeatable vacation experience that is so appealing.  All around, it’s a win-win situation for the developer, the franchise company, the lender, and for the consumer as well. 

There are presently 100 hotel projects in the Pipeline that will be marketed as Condo Hotels, another 125 hotels are constructing Private Residences, and another 21 hotels will include some Timeshare units.  “Mixed-use hotel development is an important and fast growing part of the Pipeline,” said Ford. 
Urban Cities and Major Resort Destinations 

The last development cycle saw the end of large luxury hotels and “big box” upscale projects with significant convention space and multiple food and beverage outlets.  There are very few large freestanding projects in the Pipeline that aren’t planned to be a mixed-use development.  The free standing projects that do exist in the pipeline are generally downsized prototypes of the full-service Marriott, Renaissance, Hilton, Embassy Suites, Sheraton and Westin brands, and are primarily located in suburban locations or the CBD’s of secondary markets. 

Today, the development of larger hotels in the Top 25 Markets and in major resort destinations almost always includes a residential component.  Starwood’s Real Estate Group is a market leader in these destinations.  In the luxury segment, Starwood’s family of brands has 19 of the 41 projects in the Pipeline.  Sixteen of the 19 have either residential components or will be marketed as a Condo Hotel. 
Ford said, “One of Marriott’s strategies is particularly interesting.  In urban centers it calls for high-rise towers of its Select Service brands – Residence Inns and Courtyards.  An interesting example that opened to much acclaim in December is the new Residence Inn located in Times Square with 357 rooms, which also includes 96 Private Residences.  In total, Marriott has opened 16 Residence Inns or Courtyards greater than 200 rooms in the last five years.  They have another 15 in the Pipeline, four of which will have a residential component.” 

This Select Service product offering is quite attractive to developers since it requires a smaller land parcel, has less meeting space, fewer F&B outlets, and is less expensive to construct and to operate compared to a similarly sized traditional hotel.  Yet, these contemporary designed products with superior locations have proven they can attain above-market room rates.  

Condo Hotels and Hotels with Private Residences will continue to be an attractive way to develop high-end hotels as long as the lodging recovery continues to uptrend.  “We’ll see more of them as the development cycle further unfolds.” said Ford,  “Some markets may ‘max out’ early if the residential or second home market softens or if speculators rather than end users rush to buy the units.”  Lenders may also view some markets as having too many units and may therefore be apprehensive about risk as they now are in Las Vegas.  But, as all real estate is distinctly local in nature, the assessment of these development trends will likely be made market by market.

Lodging Econometrics (LE) of Portsmouth, NH is the industry authority for hotel real estate.  


Bruce Ford
Phone: (603) 431-8740 ext. 18

Also See: Development Activity for Condo Hotels, Timeshares and Hotels with Private Residences a Significant Factor in the Lodging Industry’s Growth for ’06, ’07 and ’08 / December 2005
Hotel Guestroom Supply is Actually Shrinking in Some Markets; 11 of the Top 25 Markets Show Negative Supply Growth Through the First half of 2005 / Lodging Econometrics / July 2005

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