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The Pipeline Promise - Moderate and Smart Growth Ahead

The newest numbers of the construction pipeline are out. Here’s a breakdown of what to expect.

Thursday, July 31, 2014
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The operations side of the business is breaking new records and many industry insider believe we are nowhere near the peak. But there is always something that can come along and destroy the good times. Usually that’s an overabundance of hotel openings that come around and wrecks the supply-demand dynamic.

And yes that will happen one day. But for now it looks as if the new construction pipeline is growing at a reasonable pace and the industry won’t see any deleterious effects from new hotel openings for a couple of years.

In fact, openings these days are pretty darn low for this point in the cycle which has helped push overall room rates. That means there’s no reason for hoteliers to even consider being concerned because there needs to be a lot more shovels in the ground before we get anywhere need a full tilt building boom.

To get the complete scoop we chatted with Bruce Ford, SVP Business Development a Lodging Econometrics at last week’s BITAC® Purchasing & Design East to understand what the current pipeline numbers mean to the hospitality community and how hoteliers and suppliers can leverage the moment to their advantage.

BITAC® is of course the industry leading one-on-one meetings and relationship building event. Last week marked our golden 50th BITAC® meeting. Yup, we’ve been at it for 10 years and these events consistently attract the lodging executive elite representing leading and forward thinking companies. They’re all here to come together not just to celebrate this momentous 50th BITAC® but to problem solve, network, sign deals and exchange ideas that move forward the quality of experiences for hotel guests, while adding profits to the bottom line. There’s even time to cut loose, be social and network in a luxurious and relaxed environment.

According to Lodging Econometrics there are 421,387 rooms in the construction pipeline spread over 3,311 hotels. That includes all stages of development including pre-planning. Of that 126,380 are under construction as of the end of June. That’s significantly lower than the prior peak of 785,000 rooms and 5,883 projects which occurred in 2Q 2008.

Pipeline numbers broken down by category show there are 84 hotels with 20,374 rooms in the luxury segment and 187 hotels with 42,237 rooms in the Upper Upscale segment. The powerful midscale segment has 1,048 hotels with 146,732 rooms in the Upper Midscale segment while the Midscale segment has 440 hotels with 39,924 rooms in the Upper midscale segment. In the economy segment there are 122 hotels with 10,735 in the pipeline while the casino segment is seeing 44 projects with 15,349 rooms in various stages of development.

A contributing reason for the moderate numbers is developers are getting a late start in this cycle as until recently banks were lot more reticent to give money. That’s going to help the operations side of the business extend the good times. But developers inevitably develop and the number of hotels entering the pipeline is rising steadily.

“We are not surprised to see a spike in pipeline for the second quarter 2014. It has happened and rooms under has grown 55% year-over-year. People are building hotels and this is just the beginning,” said Ford, noting that operators shouldn’t be worried, yet. “There are no expectations on near horizon we are going to have new room openings that will cause new supply problems. The anticipated openings do not really start to grow for two more years.”

Ford said now the question developers are asking themselves is where can I buy or build hotels. And in many cases the answer is building focused service hotels in city centers.

“Developers are looking for top rate markets and select service hotels run very profitably in urban centers. The Upper and Upper Midscale segments continue to be the darlings of the new construction cycle,” said Ford.

The top development markets as of June 30, 2014 according to Lodging Econometrics are New York City with 177 rooms and 30,622 rooms and Austin with 115 hotel and 13,306. Los Angeles has 58 hotels with 11,642 rooms in the pipeline, Miami has 58 hotels (11,432 rooms) while Chicago has 43 hotels with 9,018 rooms. Also at the top are San Diego (34 hotels and 8,011 rooms), Boston (49 hotels and 7,572 rooms), Seattle (39 hotels and 7,264 rooms), Dallas (57 hotels and 6,820 rooms) and Austin (52 hotels and 8,216 rooms).

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