News for the Hospitality Executive
U.S. Construction Pipeline Sets Another Record at 5,011
Hotels with 654,503 Rooms
During 3rd Qtr - 2007 According to Lodging Econometrics
Reflects the Surge of Select Service and Mid-market Brands
Portsmouth, N.H. – October 31, 2007 - Lodging Econometrics (LE), the Global Authority for Hotel Real Estate, released its latest report to the Lodging Industry, announcing the New Construction Pipeline in the United States set a record at 5,011 projects / 654,503 rooms, making Q3 the fifth consecutive record-setting quarter.
“Guestroom counts in the Pipeline are 31% higher than the last peak in 1999,” said Patrick Ford, President of Lodging Econometrics. “However, the project count is an astonishing 47% greater. Factoring in cancellations and postponements – and New Hotel Openings of 228 Hotels / 23,187 rooms – the overall Pipeline accelerated by 375 projects / 43,162 rooms quarter-over-quarter (QoQ).”
Ford continued, “1,459 projects / 209,306 rooms presently Under Construction and those Scheduled to Start Construction in the Next 12 Months – 2,390 projects / 286,948 rooms – are both at record levels. New Project Announcements during the third quarter are at a record high of 817 projects / 102,305 rooms.”
“Surpassing 5,000 projects in the Pipeline is a milestone event,” said Ford. “It reflects the surge of select service and mid-market brands developed earlier, as well as a number of new, contemporary brands launched in recent years. Designed to meet the changing requirements of today’s business and leisure travelers, these new brands are rapidly gaining favor with developers,” Ford explained.
Ford further commented that the much-discussed credit crisis has not – as yet – significantly affected those hotels already in the Pipeline or impacted developers announcing new projects. Today, developers believe that, while construction financing may be more expensive in the short run, interest rates can be expected to stabilize at a modestly higher, yet still attractive level after the markets re-price for risk and resolve their problems.
A Decade of Strategic Repositioning: Set to Pay Off for Major Hotel Companies
Years ago, the four largest hotel companies – Marriott, InterContinental,
Hilton and Starwood and– decided to convert from owning hotel real estate
assets to providing branding and managerial services to the development
and investment communities. This leaves the risks and rewards of
real estate ownership with investors who are better able to bridge the
ups and downs of economic cycles. For the hotel companies, the strategy
minimizes the cyclicality of earnings and emphasizes sustainable fee income
streams more in line with the quarter-to-quarter demands of a publicly
traded company, which should reward shareholders with a higher valuation.
This has led to burgeoning Pipelines with the potential for generating ever-expanding fee income streams. Repositioning strategies can take years to accomplish. The process is essentially complete at Marriott, and moving to completion at Hilton and InterContinental. Also, to a lesser extent at Starwood, who will selectively develop hotels— particularly in resort destinations with a residential component.
A Variety of Brands at Different Price Points: Key to Company Growth
Each company benefits from a flow of franchise fees, but those that
have iconic brands in the luxury and upper upscale sectors have another
potential revenue stream. They offer professional management services
and often can command management and performance-based incentive fees that
drive their earnings even higher.
Companies with a family of brands designed and seeded in the last cycle
have now grown to critical mass, with hefty Pipeline totals that will drive
earnings. Developer reception to the new, contemporary brands announced
in the last few years has been positive. These new upscale entries are
attractive to developers, because cost-effective designs can be placed
in both CBD’s and Suburban locations, where there is sufficient rate elasticity
to cover escalating land acquisition and construction costs.
It takes more than a decade to develop a new brand to critical mass. The numbers are an impressive start for these companies who recently strategized to fill out their product line.
These new brands have the design, technology, marketing and reservation prowess of the major hotel companies behind them. They also have experienced franchise sales teams and a roster of interested client developers in place. Today, it is nearly impossible to create a new brand without the resources that a major hotel company provides. Developers can’t risk an unaffiliated brand and lenders generally won’t approve it. Being affiliated with a family of brands is also essential for developers who hope to successfully navigate the financing shoals ahead.
Major Hotel Companies: Ready to Reap the Benefits of Repositioning
The next four years, perhaps longer, will be a period of significant
fee income growth for the major hotel companies. Each company has between
20-26% of their existing guestroom census count – currently scheduled as
New Hotel Openings – coming from the Pipeline.
Generally, any tightening of credit conditions increases the number
of project cancellations and postponements for projects in the Pipeline.
For the third quarter, only minor increases above trend line were noticed,
but nothing of significance. It will take another quarter, or two,
before credit-related changes are felt in the Pipeline.
Announcements into the Pipeline are expected to remain strong, as developers
generally view the economy as healthy, but slowing. Not surprisingly,
franchise sales teams are reporting one of their best years.
Lodging Econometrics (LE) of Portsmouth, NH is the global authority
for hotel real estate. LE conducts Supply Side research for all markets,
developers, companies and brands— worldwide!
|Also See:||LE’s Initial Forecast for 2009 Predicts that 1,354 Hotels with 159,368 Rooms Will Open in the U.S.; Private Equity Makes a Big Splash in the Lodging Industry / July 2007|
|Hotel Construction Pipeline Reaches a Record Level; New Supply Forecast for 07 and 08 Is Modest and Will Help Boost Industry Wide Profitability / January 2007|