News for the Hospitality Executive
Construction Starts for U.S. Hotels Reach a Record Low
of 80 Projects
with 8,566 Rooms in the 2nd Qtr 2010 / LE Forecast
For the first time, Lodging Econometrics (LE) is releasing its Forecast for New Hotel Openings for 2012, with 671 hotels/64,938 rooms projected to come online, a rate nearly level to that forecasted for 2011. LE has also made minor revisions to its Forecast for 2010 and 2011, with a year-end total of 705 hotels/79,701 rooms opening in 2010 and 673 hotels/64,959 rooms in 2011.
Supply growth rates, before hotel removals from the census, are estimated at 1.7% for 2010, 1.3% for 2011 and 1.3% for 2012. These subdued rates will aid in accelerating the recovery of the industry. As demand continues to grow, there will be less new supply to be absorbed, which should help lead to a faster improvement in room rates.
CONSTRUCTION PIPELINE OVERVIEW
As expected, the US economy is in a U-shaped bottoming and recovering slowly. Business travel is increasing, causing demand and occupancy rates to show continued incremental improvement in Q2. This is positive news for hotel owners and operators, as room rates are expected to soon start upward as well.
For developers, a lack of construction financing from Main Street banks remains a serious roadblock, as it is nearly impossible to access for new hotel projects. This continues to hamper project migration up the Pipeline, as well as inhibit new projects entering the Pipeline. In Q2, Construction Starts for projects already in the Pipeline were at the lowest levels in over a decade and New Project Announcements into the Pipeline were at the lowest since Q2 2004.
In Q2, the total Construction Pipeline declined modestly to 3,325 projects/ 392,184 rooms, with projects down 2% and rooms 1% quarter-over-quarter. At 553 projects/67,641 rooms, Under Construction totals are at cyclical lows. Projects Scheduled to Start Construction in the Next 12 Months have fallen at a similar pace to 1,281 projects/134,437 rooms, while projects in Early Planning (EP) have actually increased a bit. Many EP projects have been affected by the continued uncertainty over obtaining financing. They have fallen behind schedule and have been reclassified by the developers since they have little chance of getting in the ground in the next 12 months. LE expects total Construction Pipeline counts to continue to fall before leveling some time in 2011.
KEY PIPELINE METRICS
Construction Starts for projects already in the Pipeline reached a record low of 80 projects/8,566 rooms in Q2, with project migration up the Pipeline seriously impeded by the lack of construction financing. The same concern continues to affect New Project Announcements into the Pipeline, which remain at a cyclical bottom in Q2 with 294 projects/37,978 rooms. However, Cancellations and Postponements, at 197 projects/24,540 rooms, fell precipitously as the Pipeline now has fewer speculative projects and largely contains only those that developers are committed to and are actively pursuing.
Overall, it continues to appear that this construction cycle was cut short by the financial crisis and never had a chance to fully mature. In the end, this will prove to be a boon, as supply growth will not be excessive as demand and rates improve. The hope now is that, when demand and prices more fully recover and financing becomes more readily available, construction will bounce back faster than in previous cycles.
Hotel sales and transfers have begun to show slight signs of improvement, according to LE’s recent Sales & Pricing Trends Report, with volume increases noted for the first time since the peaks recorded in 2007. Total volume for all ownership transfers reported in the public domain rose from 261 in H1 2009 to 322 in H1 2010.
For those transactions with a reported selling price, the average selling price per room increased a sizeable 77% from $56,290/room in H1 2009 to $99,480 in H1 2010. Many were early to market transactions of institutional quality. Most were newer and larger upscale branded hotels that were previously dis¬tressed, but were able to be acquired because of the availability of Wall Street generated equity and debt. In some cases, “scarcity” premiums were paid for these assets, which should be recovered easily in the upswing ahead.
|Also See:||U.S. Hotel Construction Pipeline Decelerating Rapidly; LE First Quarter 2009 Results / April 2009|