Consecutive Quarter; Mid-Market Projects Are Driving the Pipeline
|PORTSMOUTH, NH – April 19, 2006 - Lodging Econometrics (LE), the Industry
Authority for Hotel Real Estate, reported that at the end of 1Q06 the Construction
Pipeline grew to 3,377 projects having 448,156 rooms. It’s just 536
projects / 97,493 rooms below the record level set in 3Q98.
Patrick Ford, President said, “The project count in the Construction
Pipeline has increased for 10 consecutive quarters, the last five at an
accelerated pace. Recent trends indicate that Pipeline totals will
set a new record by mid ‘07 and grow further as new project announcements
are expected to continue to uptrend. We are now approximately halfway
through the current construction upswing. LE expects that Construction
Pipeline totals will peak in ‘08 or ‘09 and that New Hotel Openings will
top out in ‘09 or ‘10. Everything assumes that the pace of growth
for the overall economy remains on its forecasted track, interest rates
remain attractive and that there are not any major geo-political setbacks."
A relatively low 830 projects/122,297 rooms are in the Early Planning stage while a robust 1,584 projects/195,530 rooms are Scheduled to Start Construction in the Next 12 months.
For the most important predictor of near term supply growth, there are presently just 963 projects/130,329 rooms Under Construction, a modest increase of just 68 projects over 4Q05. Ford said, “Modest counts Under Construction mean that New Hotel Openings in ‘06 and ‘07 will be easily absorbed by rising demand offset even more in some markets by guestrooms being converted to private residences. It should result in record industry-wide profits for both ‘06 and ’07, perhaps longer as well.”
LE forecasts that 847 new hotels are expected to open in ‘06 having 89,269 rooms and in ‘07, 1,084 hotels with 119,665 rooms. New Supply growth in ‘08 will increase as well with ‘09 probably being the first year to feel any serious upward ratcheting of New Supply coming online.
1Q05 construction “Starts” are the highest counts ever reported by the development community and are a bit problematic for projecting New Supply growth. Today, many franchise companies contractually require franchisees with Upscale and Midscale projects to break ground within twelve months of agreement. Those timelines are difficult to meet with increasingly more complex permitting processes, rapidly rising construction costs, frequent material shortages, rising interest rates, value engineering redesigns etc.
In other cycles many of today’s “Starts” would have been placed in the Early Planning stage which would serve to more appropriately apportion out project totals across the three stages of the Pipeline.
The majority of 1Q “Starts” will take longer than twelve months to begin
construction, requiring extensions with the brands, and will impact New
Hotel Opening totals much later in the cycle then one might first think.
Therefore, LE’s forecasts for New Supply coming on line in ‘06 and ‘07
are adjusted for the fact that experience shows only 46% of all reported
“Starts” will actually begin construction in the upcoming twelve months.
Presently there are a record 1,328 Midscale w/o Food and Beverage projects having 113,935 rooms in the Construction Pipeline. Both project and room counts are already up 120% over the peak set in the last cycle and are expected to accelerate forward over the next two years as well.
Ford said, “InterContinental’s Holiday Inn Express with 342 projects in the Pipeline and Hilton’s Hampton Inn and Suites with 284 projects are the runaway leaders in this sector. Both have achieved an interesting milestone: at the end of 1Q06, Hampton Inn and Suites had 112 projects “in the ground” while Holiday Inn Express had 105.
Other strong developer favorites are Comfort Inns and Suites with a total of 159 projects in various stages of the Construction Pipeline and La Quinta Inns and Suites with 124.”
Interestingly, the Midscale with Food and Beverage sector with 265 projects/24,770 rooms in the Pipeline is also up 120% ahead of the peak set in the previous cycle. This sector is lead by the resurgent full service Holiday Inn brand with 121 projects throughout the Pipeline and Best Western with 106 projects.
With the exception of Holiday Inn, which averages 120 rooms in size, all other Midscale brands average about 85 rooms. These small, easily financed projects are frequently built by developers new to the lodging industry and are located in outer suburbs, at highway locations and in smaller towns.
Significantly, for the 848 projects in the Pipeline, 517 or 61% are
smaller than 100 rooms. Another 277 are between 100 and 200 rooms
meaning that 94% of all Pipeline projects are less than 200 rooms.
At 1Q06, there were 50 Luxury projects having 15,969 rooms in the Pipeline, also ahead of the peak set in the last cycle. Of the 50 projects, 39, or nearly 80% of all Luxury projects will have some combination of Private Residences, Condo Hotel units, Fractional Vacation Club or Timeshare interests. 10 others will be part of major office or retail development projects.
31 projects are located in urban or major suburban areas while 19 are in destination resort locations. 20 of the projects belong to Starwood’s family of brands. Seven will be a Four Seasons, six an InterContinental and five, Ritz-Carltons. Development is booming in the Luxury segment as operationally this sector has the highest occupancies and commands the most impressive room rates. Consumer interest for the residences or for investment in the hotel units reflects the growing desire by high income suburbanites to return to urban center living, for and in other cases, for second homes and repeatable vacations at the nation’s prime resort areas.
These mixed-use facilities are very attractive to the development community as they represent front end cash flow to the developer and can mean lower holding costs over the life of the project. Attracting consumer financing permits the development of these high cost hotels, some of which might not otherwise be feasible.
More Upscale Construction Announcements Expected Later in ’06 and in ‘07
It’s too early in the cycle for large urban center Full Service projects with multi-food and beverage facilities and extensive meeting space to receive much developer attention. Many projects opened in the nation’s primary and secondary markets late in the last cycle and, generally, fully developed out those locations. “Big Box” hotel development normally runs in parallel with Central Business District (CBD) office development which rekindles as employment improves and demand for office space increases. Office demand has only just recently begun to improve. There is still vacant space to be absorbed before there will be a wave of new office construction. Of the Top 25 office Markets, 20 still have double digit vacancy rates in their urban centers.
What is growing in popularity with urban center developers is large Select Service projects. Surprisingly, of the 190 CBD projects in the Pipeline, 108 or 57% are Select Service projects.
With little or no meeting space and minimal food and beverage facilities, these vertically designed facilities require relatively small land parcels. With less investment per room and with smaller operating staffs, they are able to offer room rates substantially below established Full Service hotels. They provide room rate alternatives within a companies’ reservation system, are attractive to tourists, international travelers and to commercial guests not requiring a full-service facility. Courtyards and Residence Inns by Marriott, Hilton Garden Inns, Hampton Inns and Suites and Holiday Inn Express are amongst the preferred brands.
There has been considerable developer enthusiasm for Select Service brands in urban centers. It may yet grow to eclipse developer interest for the traditional Upscale Full Service projects as we enter the second half of the development cycle.
Lodging Econometrics (LE) of Portsmouth, NH is the industry authority for hotel real estate. LE’s Development Pipeline databases contain individual project records for Hotel, Condo Hotel and Timeshare development throughout the U.S. and Canada.
|Also See:||The Lodging Development Pipeline is Rapidly Accelerating; Construction Pipeline Grows to 3,067 Projects Having 415,977 rooms / January 2006|