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Hotels in Construction Cycle Peak

At this week's BITAC®, the new construction pipeline was examined for new openings and project cancellations.

Wednesday, July 15, 2009
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There’s been much ado about something in the hotel industry. With funding scarce and demand down the new construction pipeline has been retracting. It’s a concern scaring suppliers and buyers who worry that shrinking numbers will affect the ability for these folks to do business.

Another predominant fear is the recent spate of new hotel project cancellations and postponements. Combined, industry insiders are nervous there isn’t enough business out there to keep everyone flush. It’s giving even the most experienced hoteliers pause and creating irrational anxiousness.

But the best way to quell fear is to look at the numbers. And at this week’s BITAC®, also known as the Buyer Interactive Trade Alliance and Conference, this week’s sold out Purchasing and Design East event took time to unravel what exactly is happening with the new construction pipeline.

Taking a closer look at the numbers, turns out that new construction starts seem to not only be stabilizing but are poised for future increase while the worst of the project cancellations are behind us.

“There is an extraordinary amount of activity under construction. The United States is pretty much at its construction cycle peak,” said Shawn Ford of Lodging Econometrics. “We are significantly above 2003-2006 numbers and not in as bad a shape as [one] might think.”

According to Lodging Econometrics data, the United States has 619,431 rooms representing 4,918 projects in various stages of planning and construction. That’s just a 15 percent decrease from its peak. Canada has 228 projects with 27,278 rooms under construction and Latin America has 573 projects in the works with 100,886 rooms. All other regions combined add another 3,389 projects with 754,902 rooms into the mix.

Though 2009 will see more US hotels open than in any other previous year, the domestic dip in the pipeline will start to have an effect on new hotel openings in 2010 and 2011.

Looking ahead to hotels that will open in 2010 and beyond, it’s critical to look at construction starts. Ford noted that during 4Q 2008 and 1Q 2009 (the most recent numbers available), about 28,000 rooms broke ground during each three month period. While not ideal, it’s not a worst case scenario situation as many prognosticators have been fretting over.

“Hotels are going from the planning stage to breaking ground. It’s not going gangbusters, but it’s sustainable,” said Ford.

What has most people really concerned is the appearance of mass postponements and cancellations of new hotel projects. The problem here seems to be a mix of reality and media hype that has been hyper focused on writing about big name postponements in places such as Las Vegas and Macau. It’s caused many people to get spooked and worry there has been wholesale cancellations.

Here’s the truth. During 1Q 2009 about 80,000 rooms were postponed or cancelled representing 573 hotels. It was the most to date and an expected peak. But to put that into context, during the big boom that yet to slow in 1Q 2008 when about 40,000 rooms were cancelled, which fell into a historical average. So while the numbers seem large it’s only a difference of about 250 hotels in the United States. “This is a naturally occurring cycle,” said Ford.

Ford said the projects most likely to be removed from the pipeline are not just the big casino resort type projects but four and five star properties as well. For the foreseeable future expect to see smaller projects enter the pipeline where funding is coming from established relationships in the local community. It’s a segment of the market that has not been affected by this past year’s credit crunch.

Of the major hotel companies globally InterContinental Hotels Group has the most hotels in the pipeline with 1,052 projects (105,805 rooms). Marriott has 710 projects (92,373 rooms), Hilton has 774 projects (91,434 rooms) while Choice has 615 hotels (47,817 rooms) and Starwood has 100 hotels (14,472 rooms) in various stages of development or construction.

Ford suggested to industry suppliers it should be a “high priority” to sell to under construction hotels. He also said the industry should be prepared to see more renovations taking place with mid- and upscale hotels first. And also to be on the lookout for capital funds that are forming with the intent to snap up distressed assets and companies. Following these sales these properties typically make a determination as to what type of renovation if needed will take place.

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RE: Hotels in Construction Cycle Peak article link
Is there any way to find out where to get a list of developers/owners that have projects in need of funding? We are a small company developing 2 hotels in NYC and while we were arranging our construction financing we were able to identify over 20 funding sources who had an appetite for ground up hospitality development. We are involved with these organizations as the vetters who prove out project viability for owners and developers and are always interested in working with those that have great projects
Posted by: Mr. Jeremy Loy
Email: jloy@omnifineart.com

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