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Robust and Healthy Pipeline Belies Industry Fear The sold out crowd at BITAC Purchasing & Design West learned about a healthy and well financed new construction pipeline. Thursday, October 23, 2008 Glenn Haussman

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While many in the hotel industry are bracing for rough and tumble times, there are strong indicators that what’s happening is really more of a perception of bad times, than truly bad times. Pockets of the country may be suffering occupancy losses, but others are as strong as ever.

And the same is true with the hotel industry pipeline. There have been some notable project delays or cancellations, but so far the lion’s share of problems has been focused in Las Vegas. Boyd Gaming’s Echelon may be on hold as is The Plaza project, but these are mega-projects requiring billions in capital. Securing financing for unusually expensive projects in a market some experts feel is overbuilt is very different the relatively inexpensive cost of building a select service hotel in tertiary markets, or overseas.

At this week’s Buyer Interactive Trade Alliance and Conference: Purchasing and Design West (BITAC) sponsored by Hotel Interactive, the mood at the sold out event was genuinely buoyant about current conditions and future expectations.

According to Shawn Ford, Director of Business Development with Lodging Econometrics, there are a lot of rumors out there when it comes to the new hotel construction pipeline. “Everything that you have heard is probably not true. There is a lot going on, including a healthy and robust pipeline,” said Ford, whose firm tracks hotel development globally from early planning stages to opening day.

But a pervasive “Chicken Little” attitude seems to be psyching out normally calm and cool professionals. “Only a very few select projects having problems with financing have stopped. Ninety eight to 99 percent of projects that are started will be finished,” said Ford. “The truth Is RevPAR is up and there has been no crash and burn in the hotel industry like in other industries. There was no wholesale drop in RevPAR from. 2007, which was a record year, and we are still increasing from that point.”

Ford predicts 2008 profits will fall somewhere in between 2006 and 2007, both record breaking years.

With nearly every single project expected to open 2009 under construction, the product pipeline is healthy. Lodging Econometrics estimates there to be 5,562 total projects in the United States totaling 740,272 rooms. This year a total of 135,070 should open while even more rooms will come online in 2009 and 2010 with 158,851 and 158,889 rooms respectively.

On a global basis Ford said Asia and Middle East are very active and aggressive in getting projects developed and in the ground. In Asia there are currently 2,226 projects in various stages of development while Europe has 1,022 projects. Middle East has 556 projects, while the Caribbean, Mexico and Central America have 329. Canada alone has 245 hotels under active development.

Though there does seem to be issues concerning franchising, any financing related issues won’t affect new hotel openings until at least late 2010. But with industry fundamentals in good shape and no shaky lending practices under scrutiny, it shouldn’t be a long term issue, said Ford. “When financing rights itself, it will look favorably on hospitality. There wasn’t any subprime lending out there and not a lot of overleveraged property,” he said.

Further bolstering his arguments is the availability of capital for smaller projects. He said mid-scale and smaller projects more likely to get funded and are relatively financeable at local banks.

And since there is a softness in occupancy –though ADR and RevPAR remains strong – Ford recommends companies sitting on a lot of profitability to renovate to be better positioned when markets stabilize.

Finally, Ford noted that 60 percent of the U.S. project pipeline have already affiliated with a flag from one of the five leading hotel companies, which are InterContinental, Hilton, Marriott, Choice or Starwood. He expects up to 75 percent of hotels will select a brand flag before opening. 

Currently, InterContinental has nine brands with 1,246 projects in the works totaling 130,234 rooms and a full 21 percent of the overall pipeline. Hilton has 10 brands, 875 projects with 108,353 rooms in the pipeline, which accounts for 15 percent of the project pipeline total. Marriott nine brands have 805 new hotels in the works totaling 116,262 rooms and 14 percent of the pipeline while Choice’s 12 brands have 931 projects with 75,208 rooms and 16 percent of the pipeline. Starwood Hotels and Resorts Worldwide trails with three percent of the total pipeline with 199 projects with 38,813 rooms under way.