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Record Renovations Portend Future Building Boom

The coming Building Boom is inevitable. So the question is, are you going to get in before it’s too late?

Monday, January 14, 2013
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With the hotel economy in great shape the inevitable is starting to happen, people are thinking about building hotels. It was only a matter of time and completely expected. After all, figuring out the next stage of the hotel health cycle is nearly as easy predicting that the New York Jets never had a chance this past year. (And yes I am a recovering Jets fan).

So with hotel health looking good, the industry is off to the next stage of the cycle: getting set to build new hotels. It’s always the same way after an operating recovery. The industry starts to pull in some exciting numbers and then developers start sniffing around at opportunity to capitalize on the good times by building new hotels. Of course that will eventually lead to another inevitable outcome several years from now that will help kick off the down cycle as supply eventually outstrips demand.

But that’s several years away from happening, and for now smart owners and developers are thinking about building brand spanking new properties. And that means the hotel industry new construction pipeline is once again on the rise.

According to Bruce Ford, SVP Business Development at Lodging Econometrics, 40 percent of today’s total new construction pipeline has entered in the last 12 months. Those attending the sold out BITAC® Owners conference last month at the luxurious St.Regis Monarch Beach, learned all about opportunities awaiting savvy developers. BITAC® is of course the industry’s preeminent idea exchange and at this event attendees not only got a chance to network with top industry decision makers such as owners and developers, but also get the inside track on what is really happening in the hotel business.

Ford said for seven quarters in a row new project announcements have been growing. “We’re seeing new signings in the hotel industry. We had 153,000 new rooms enter the pipeline in the last 12 months. And the pipeline is only at 350,000 rooms,” said Ford. That’s a positive sign that people are beginning to bet that the end of 2013 and 2014, 2015 looks like a great time to be opening a hotel.”

However there are many different factors that are going on in the lodging business said Ford. One major story has been people are putting off decisions to buy and sell hotels, creating a lull in the transaction side of the business. Ford says many owners are saying they are deciding not to decide.

But with a lot of inventory available, Ford expects transactions to rise dramatically in 2013.

“Some owners are also choosing to say, ‘I’m going to choose to invest a little bit incrementally; make the brand happy; get them off my [case] because they’ve been killing me for the past three years because I haven’t been doing the renovations that they want me to do. So I’m going to satisfy them a little bit with a renovation and put off the decision to sell down the line.’”

And this mindset, along with other factors is creating a scenario of record renovations that is proceeding the inevitable building boom. Two thousand twelve was a record year for renovation and Ford said to expect the same in 2013 and 2014. In fact he thinks as much as 35 percent of the existing branded and independent supply in the US will get a makeover during those three years.

Here is what’s going on in some select major markets:

According to Ford the convention market is booming and the Massachusetts Port Authority has approved the construction of eight new hotels around the Convention Center in Boston for a total of 3,000 rooms.

There will be an expansion at the existing Westin and most likely an Autograph Collection hotel.

New York
Ford says everyone wants to visit New York and hoteliers want to build in New York, including many of its submarkets such as downtown Manhattan, the Upper West Side, the Upper East Side and Harlem.

Currently there are 63 new hotels under construction now with more than 11,000 rooms.

“Between 2010 and 2014 we’ll roughly increase the supply in New York by a total of 15 percent for hotel rooms. That’s well above inflationary numbers. The anticipation for renovations in New York is also high. And everybody wants to be there. And so it just never ends.

Washington, D.C.
It’s been a soft year in this market, said Ford, as an election year means there were not as many constituencies traveling to D.C. to lobby the Congress.

“So in D.C. it’s been a soft operating performance year, which is not uncommon. Every four years when you have an election year you have a soft operating year. But it has been a great time to renovate. People have owned there for a long time. They know that that’s the renovation year, so we’ve seen quite a bit of that happen. But there’s still a significant pent-up demand. There are 120 properties estimated to renovate in the next two years,” said Ford.

There are nine hotels under construction with seven more scheduled to start. But there are also a lot of over-leveraged hotels in Atlanta and those problems have not yet worked themselves out.

“There was a lot of kicking of the can down there. Additionally to that, because they had the Olympics there in 1996 there was the largest number of hotels that were built right around that time that are, once again, facing their first renovation, over-leveraged, not enough equity. So there’s been a lot of management change in Atlanta too in terms of hotels.

But it’s a market that has still got time before it’s really going to play itself out. And it may be a late comer in the cycle so I expect Atlanta will be investing in their hotels for the next couple of years and trying to recycle their leverage problems there,” said Ford.
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