Hotel Construction Up, As Is Economic Uncertainty

The hotel construction pipeline reached a new milestone in 2007, according to Lodging Econometrics. But a record number of hotel rooms may be entering the U.S. market at a time of softening demand. The lodging real estate consulting firm, based in Portsmouth, N.H., said that the lodging construction pipeline stood at 5,438 projects, encompassing 718,387 guestrooms as of the fourth quarter of 2007, breaking the 700,000 barrier for the first time. The lion’s share of the projects are in the upscale tier, encompassing brands such as Courtyard by Marriott and Hilton Garden Inn; and the mid-scale, without food and beverage sector, with brands such as Hampton Inn and Holiday Inn Express. The firm’s president, Patrick Ford, says aggressive marketing and sales programs from leading hotel companies, via their franchise sales teams, is a major reason for this growing construction pipeline. Another reason is these projects are financed by commercial and regional banks, which haven’t been as adversely affected by the credit crunch as many larger lenders, he said. New hotel openings also increased in 2007, with 985 hotel rooms, with 100,507 rooms, a gross supply growth rate of 2.2 percent. The firm forecasts new openings for 2008 at 1,208 hotels with 133,628 rooms, a 2.8 gross supply increase. Indeed, the lingering impact of the credit crunch and a declining economy could mean a shortened positive cycle for the industry, Ford said, noting that hotel demand growth has been less robust than in the lodging industry’s previous recovery cycle in the 1990’s. He notes that since the industry’s low-water mark in 2003, demand has only grown in excess of 3 percent in 2004 and 2005. That is in sharp contrast to the 1990s, when, after the industry’s trough in 1992, demand growth exceeded 3 percent in seven of the next eight years. The lodging pipeline is typically a lagging indicator to U.S. economic performance, Ford said. He also noted that government initiatives to thwart a recession, such as the Fed’s interest rate cuts, and the economic stimulus package, will take time to have any positive impact. In that environment, Ford sees fewer new project announcements this year, particularly among boutique hotels, unbranded hotels, and resorts. He also sees a fall-off in announcements of lodging properties in central business districts, and in mixed-use projects. The level of consumer confidence will ultimately be a crucial barometer of the lodging industry’s health, Ford said. “You have to keep your eye on the consumer,” Ford said. “Many are going to have to live within their means. Many are maxed-out on their credit cards, and have no place to access cash. They are less likely to take trips, and less likely to trade up to luxury accommodations.”