Lodging Econometrics, an industry group, reported that at the end of the first quarter of 2006 the construction pipeline grew to 3,377 projects having 448,156 rooms. That’s just 536 projects and 97,493 rooms below the record level set in the third quarter of 1998.
Patrick Ford, president of the group, says, “The project count in the construction pipeline has increased for nine consecutive quarters, the last five at an accelerated pace. Recent trends indicate that pipeline totals will set a new record by mid 2007 and grow further as new project announcements are expected to continue to uptrend.”
Patrick forecasts construction to peak in 2008 or 2009 and that new hotel openings will top out in 2009 or 2010.
A relatively low number of projects — 830 projects and 122,297 rooms — are in the early planning stage. There are 1,584 projects and 195,530 rooms in which the construction phase is scheduled to start in the next 12 months.
For the most important predictor of near term supply growth, there are presently just 963 projects and 130,329 rooms under construction, a modest increase of just 68 projects over the fourth quarter of 2005.
“Modest counts under construction mean that new hotel openings in 2006 and 2007 will be easily absorbed by rising demand offset even more in some markets by guestrooms being converted to private residences,” Ford says. “It should result in record industrywide profits for both 2006 and 2007, perhaps longer as well.”
Lodging Econometrics forecasts that 847 new hotels are expected to open this year, having 89,269 rooms, and in 2007, 1,084 hotels with 119,665 rooms. New supply growth in 2008 will increase as well with 2009 probably being the first year to feel any serious upward ratcheting of new supply coming online.
Presently there are a record 1,328 midscale hotels without food and veverage projects having 113,935 rooms in the construction pipeline. Both project and room counts are already up 120 percent over the peak set in the last cycle and are expected to accelerate forward over the next two years as well.
InterContinental’s Holiday Inn Express with 342 projects in the pipeline and Hilton’s Hampton Inn and Suites with 284 projects are the leaders in the sector. Other strong developer favorites are Comfort Inns and Suites with a total of 159 projects in various stages and La Quinta Inns and Suites with 124.
The midscale sector with food and beverage has 265 projects and 24,770 rooms in the pipeline. That figure is 120 percent 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, 61 percent are smaller than 100 rooms. Another 277 are between 100 and 200 rooms, meaning that 94 percent of projects are less than 200 rooms.
There are 50 Luxury projects having 15,969 rooms in the pipeline, also ahead of the peak set in the last cycle. Of the 50 projects, nearly 80 percent will have some combination of private residences, condo hotel units, fractional vacation club or timeshare interests. Ten others will be part of major office or retail development projects.
Thirty-one projects are located in urban or major suburban areas while 19 are in destination resort locations. Twenty 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.
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 percent 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 opscale full-service projects during the second half of the development cycle.
