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Where Are We in the Hotel Cycle? What's the
Real Threat of New Supply? 

By Jim Butler, Hotel Lawyer | Author of
22 May 2007

At the recent Meet the Money® conference on hotel financing, Mark Woodworth, Executive VP of PKF Consulting, presented the latest report from PKF Hospitality Research to a crowd of more than 450 hotel industry leaders who gathered to connect with all the top debt and equity financing sources for hotels and hotel-related projects. Mark Woodworth's presentation helped answer the questions on everyone's minds: (1) Where are we in the hotel cycle? (2) What is the real threat of new supply? and (3) Where do we go from here? 

His information and answers were very interesting . . .

The questions about the hotel industry that are on all our minds

(1) Where are we in the hotel cycle? 

Mark Woodworth started things off by saying that "Things are great!"

  • Profits: Up 44% since 2003!
  • Cap Rates: Spreads 38% below historic norm!
  • Values: Prices keep going up!
But where are we in the cycle? Are we nearing the peak? Are the good times about to come to an end? 

Here is Mark's graphic demonstration of where he thinks the U.S. hotel industry is in the cycle, and also where it has been the past several Meet the Money® sessions.

Importantly, Mark notes that ADR has recovered and is still growing. (Note the long term trend lines for ADR and occupancy) Mark believes that the fundamentals are so good that although we are nearing a "peak," we may "plateau at the peak" for some time before riding into a down cycle.

As the following chart shows, in real terms, we have not yet achieved any inflation-adjusted NOI growth from the 2000 levels. This is one factor that has dampened the economic justification for new hotel development, and consequent room supply growth during industry's recovery over the past 5 years.


(2) What is the real threat of new supply?

But what about the threat of new supply? The hospitality industry is one that usually creates its own speed bumps by overbuilding, driving up supply faster than demand, and then watching crumbling economics. Certainly we have seen a kick up in supply, but will the results be different this time?

PKF research shows that there has been an incremental increase in the current construction pipeline, but Mark says, "We are nowhere near the last decade's level of product under construction." And here is Mark's slide comparing the year-to-year increase in supply during the decade of the 1990s to the current decade. PKF believes that new construction will accelerate, but at levels well below what the industry saw the last time around.

And a major reason that supply growth has dampened is the prohibitive cost of new construction, which as PKF notes, have gone up, but are unlikely to go down.
The practical, real-world consequences of all this is shown in this fascinating pair of supply and demand charts that puts supply and demand changes in perspective over the past 20 years across the top 52 U.S. markets.

(3) Where do we go from here?

Mark told the assembly at Meet the Money® that, "This is a wonderful time to be in the hotel business!" The industry's performance the past few years has been exceptional. The strength of fundamentals continues to attract capital.

As supply ramps up, PKF sees a few high supply growth markets, which include some historically difficult markets such as Los Angeles, New York, Orange County, San Diego and Tucson. 

Charlotte Ft Worth Houston Los Angeles Nashville Omaha Orange county Philadelphia Phoenix San Diego Tampa Tucson
PKF sees a slowing in the hospitality industry growth from the recent explosive few years, but compared to historic averages, things look good.

PKF's summary of our situation and prospects.

  • Strength of fundamentals continues to attract capital
  • Transaction activity remains high - this condition will persist well into 2008
  • Upward pressure on Cap Rates -values to level off
  • Development costs remain high - no downturn in sight
  • Hotel openings will begin in earnest in '09-'10
Is the "easy" money is behind us? Yes, and here's why:
  • No more lift from cap rate compression
  • Revenue growth will moderate
  • Expenses keep creeping up: labor, utilities, property taxes
Even so, Mark's summary puts it all in context. We shouldn't forget his words when the doomsayers tell us the end is near. He said, "It remains a wonderful time to be in the hotel business!" 

We couldn't agree more.

R. Mark Woodworth, President of PKF Hospitality Research can be reached at 404.842.1150 or For a copy of PKF's "2007 Annual Trends" which is now available, contact

Please send me your thoughts at

About the Author:
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.  He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders.  Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.  In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon.  This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers.  They are also hospitality consultants and business advisors.  They are deal makers.  They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack.  Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.  Jim is the author of the Hotel Law Blog,  He can be reached at +1 310.201.3526 or


Jim Butler
Chairman, Global Hospitality Group
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, CA 90067-4308
(310) 201-3526 direct


Also See: Demand Slowdown and The Hotel Supply Conundrum / PKF / April 2007
Industry Outlook: Looking Back on 2006 , Looking Forward to 2007 / Global Hospitality Advisor / December 2006
Lodging Econometrics Forecasts 1,079 New Hotels Will Open in 2008 / July 2006

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