New Hotels Will Open in 2008
|Portsmouth, NH – July 18, 2006 - Lodging Econometrics (LE), the Industry
Authority for Hotel Real Estate, in its mid-year report to the Lodging
Industry released its Supply Side Forecast for 2008, for the first time.
LE forecasts that 1,079 New Hotels will open in 2008, having 131,517 rooms.
It’s a 2.8% gross addition to supply, prior to any hotel removals from
the census for conversion to other real estate usage.
LE also made minor adjustments to its previously released ’06 and ’07 forecasts after reviewing over 3,400 projects in the Construction Pipeline with individual developers and re-verifying anticipated construction start and completion dates with various brand managers.
LE’s president, Patrick Ford, said, “Construction Starts for the last four quarters accelerated to 976 hotels/125,540 rooms, a 50% Year-over-Year (YoY) increase, and the highest level for this cycle. It reflects a higher pace of New Project Announcements (NPA’s) over the last six quarters and is an indicator that projects are now migrating forward more rapidly through the Pipeline.”
Construction Pipeline at a New Cyclical Peak
At the end of the second quarter (2Q06), the total Construction Pipeline
stood at 3,436 projects/ 463,629 rooms. It’s a new high for this
cycle but about 15% below the peak set in 1998. That peak could still
be exceeded in 2007 if rising interest rates don’t seriously curtail development.
While projects Under Construction are 40% below the ’98 peak, 1,582 projects are Scheduled to Start Construction in the Next 12 Months. Ford said, “That’s near below the record level set last quarter and another indicator in support of an accelerated forecast for New Openings in ’07 and ’08.” Project counts in Early Planning are still modest and are well below previous peaks.
New Project Announcements are Down Quarter-over-Quarter (QoQ) as Developers Turn Conservative
374 new projects were announced into the Pipeline in 2Q06, down 206 projects from the 580 reported in the 1st Quarter. It’s the lowest NPA count in six quarters.
Ford explained that the era of easy borrowing is about over. “As a result,” he said, “The investment landscape has turned decidedly more conservative in the last few months. While lenders are anxious to provide capital to the industry, they remain well disciplined and still require considerable equity from the developer for each project. Interest rates have risen sharply and indications are they’re headed higher still. Land parcels remain scarce and prices are escalating. Rapid cost increases for construction materials are forcing frequent design changes to meet budget thresholds. Overall development costs are increasing faster than the rate of inflation.”
Growing geo-political concerns, slower economic growth, a less confident consumer, skyrocketing costs of travel and rapid increases in operating costs – for labor, benefit programs, property insurance, energy and property taxes – are causing developers to pause. Any new projects announced today would open beginning in late ’08 or early ’09, a time when the economy would likely have softened, and a time when 70-80% of the upside operating potential for this lodging cycle would have already been attained.
Many of the economic and financial trends that have caused the residential
market to slow could now serve to brake Mid-market and Economy lodging
development. Conditions are changing rapidly. A slower economy
ahead, with higher rates of inflation will require deeper analysis of market
Pipelines and more thorough feasibility studies.
In 2Q06, NPA’s were down 206 projects QoQ. 143 projects were attributed to the nine leading franchise companies, as growing developer concerns showed up in a slower pace for newly executed franchise agreements.
Nonetheless, Total Pipeline growth was still positive as the nine companies showed an over all increase of 60 projects. Marriott’s Construction Pipeline showed the biggest increase, growing by 32 projects, followed by InterContinental with 26, Choice with 22 and Hilton and Starwood with eight each.
Combining both Reflaggings and New Construction projects together, InterContinental had 728 projects/73,747 rooms in the Development Pipeline. Hilton had 578 projects/72,989 rooms; and Marriott 505 projects /68,153 rooms. InterContinental’s project count is positively impacted by 350 Holiday Inn Express hotels under development; and Hilton’s by 289 Hampton Inns and Hampton Inns and Suites. Both have smaller prototypical designs under 100 rooms, a project size which Marriott chooses not to compete.
For Total Openings in ’06, Hilton will open 32,089 newly constructed
or reflagged rooms, InterContinental: 25,756, Marriott: 20,030, Choice:
17,714, and Starwood: 13,473 rooms.
The Top 25 Markets have about 30% of the industry’s existing guestroom census, yet they are scheduled to receive just 24% of the New Supply coming on line in ’06, and 28% in ’07. In the first half of ’06 (1H06), occupancies are currently running 9.6 percentage points higher than the remainder of the industry, room rates are some 38% higher and RevPARs are an amazing 60% higher.
At 4Q05, LE reported that all but eight markets had fully recovered to pre 9/11 operating levels. Ford said, “In our mid-year analysis, we once again evaluated operating performance and concluded that three markets – Chicago, Dallas and Denver – have newly established outperforming trend lines and will in fact complete their recovery a year earlier, joining Atlanta and Nashville in ’06. Boston, Detroit and San Francisco should follow in ’07.”
Further operational analysis showed that in 1H06, seven cities experienced
minor decreases in demand from high occupancy plateaus. But, rate
increases were so strong, and supply change was either negative or only
modestly up, causing room revenue, and most likely profitability too, to
show strong YoY improvements.
At the end of 2Q06 Construction Pipelines were largest in Washington,
DC, New York, Dallas, Los Angeles and Atlanta.
Washington, DC, New York and Los Angeles have already recovered to pre 9/11 operating levels and have strong occupancy and room rate trends. Atlanta and Dallas are performing well and will have fully recovered by the end of this year. A review of current operating trends indicates that each city will be able to comfortably absorb the new supply scheduled to come on line over the next three years.
“Similarly,” said Ford, “We assessed other major markets and their ability to absorb forecasted new supply. We analyzed any year where New Supply was forecasted above an arbitrarily set 3% gross growth rate – (which might variously net out as low as 2% after removals from census). Boston and Norfolk can comfortably absorb their supply increases in excess of 3% in ’06; New York, Orlando, Philadelphia, Phoenix, San Diego, Washington and St. Louis can in ’07, and Minneapolis, Tampa, Detroit and Norfolk should be able to in ’08. Occupancies may fall minimally but rising ADR and RevPAR will provide an offset. Only San Antonio in ’07 and ’08 and Seattle and Dallas in ’08 might have absorption difficulty based on current supply and demand trends.”
Taken together these trends indicate that the major cities are poised
to continue to drive industry operating and profitability performance through
the end of the decade.
LE has an individual record for every actively pursued hotel project
– in each stage of construction – for every region and country of interest
to you – throughout the world. Receive important project details
including contact information for the developer along with its latest project
start and completion dates for: New Construction Projects, Hotels with
Residences, Reflaggings, Condo Hotels, Announced Renovations • Serviced
Apartments, Casino Projects, Timeshare Projects.
|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|
|Falling New Hotel Supply Additions in the 25 Largest U.S. Markets Are Boosting Industry-wide Operating Results / Lodging Econometrics / February 2005|