The Construction Pipeline continued its upward momentum in Q2 14, posting a double-digit gain Year-Over-Year (YOY) for the third consecutive quarter. At Q2 14 the Pipeline stands at 3,311 Projects/ 421,387 Rooms, an increase of 17% by Projects and 20% by Rooms YOY. The Pipeline has been increasing for the past nine quarters off the bottom established in Q1 2012.
Projects Under Construction are on a 12-quarter uptrend and are up a strong 50% by projects and 55% by rooms YOY. Increasing for eight quarters, projects Scheduled to Start Construction in the Next 12 Months are showing an increase of 21% by projects and 25% by rooms YOY and stand at 1,354 Projects/ 161,204 Rooms.
These counts are rising smartly and are impacted by a flow into the Pipeline of Upper Upscale and Upper Midscale New Project Announcements (NPA’s) between 100 – 200 rooms. Many are “lifestyle” brands or new prototypes of older brands designed to attract millennials and will lead to uptrending supply growth in late 2014 through 2016 and beyond.
As is customary for the early years of a new real estate cycle, Early Planning is showing decreases: 7% by Projects and 4% by Rooms.
LE Announces its Forecast for New Supply in 2016
For the first time, LE released its forecast for New Supply in 2016, while revising slightly its projections for 2014 and 2015. New Hotel Openings in 2016 are forecasted to be 871 Projects/ 97,540 Rooms. Since the average project takes 22 months from its initial announcement to its opening, the forecast is largely predicated on projects already in the Pipeline, with consideration for NPA’s anticipated over the next year. Although uptrending, Pipeline and New Hotel Opening counts still seem below pace in this cycle compared to previous cycles.
Conditions Do Seem Ripe for an Acceleration in Development Activity
GDP, after running at a slight negative pace in Q1, rebounded smartly to an annual pace of 4% in Q2. Most economic indicators, including consumer confidence, are at cyclical highs. Employment levels are at pre-recession highs and unemployment continues to decrease.
In the lodging industry the recovery is now complete. Demand is soaring while new supply additions are quite modest, sending room revenues to cyclical highs. Remarkably, Occupancy could finish in 2014 at a 16-year high!
Industry conditions seem ideal, and with the assistance of a stronger economy, supply/demand pressures could further build, causing an acceleration of NPA’s into the Pipeline over the next three years. That would lead to substantially higher levels of New Hotel Openings 2017 through 2019 when the current real estate cycle begins to crest.
Upscale and Midscale Chain Scales Dominate the Pipeline
As of Q2 14, 62% of the Total Pipeline by proejcts are in the Upscale and Upper Midscale chain scales. Three Franchise Companies dominate the Pipeline: Hilton Worldwide with 648 Projects/ 76,169 Rooms, Marriott International with 638 Projects/ 79,543 Rooms and InterContinental Hotels Group with 552 Projects/ 56,388 Rooms.
Hilton’s Pipeline is lead by the Upscale Hilton Garden Inn and in Upper Midscale, Hampton Inn & Suites and Home2Suites. The brands that top Marriott International’s Pipeline are the Upscale Residence Inn and Courtyard labels and the Upper Midscale Fairfield Inn and TownPlace Suites. InterContinental Hotels Group has great concentration in Upper Midscale with their Holiday Inn and Holiday Inn Express labels.