Finance & DevelopmentHotel Operating Metrics Hit Record Highs

Hotel Operating Metrics Hit Record Highs

Now at 3,885 projects with 488,230 rooms, the total construction pipeline has shown seven consecutive quarters of growth, with the last three quarters posting year-over-year gains of 20 percent or greater. The pipeline is approximately halfway through the expansion phase of the current real estate cycle but is still a third below the peak of 5,883 projects with 785,547 rooms established in the first quarter of 2008. The pipeline has at least two more years of rapid growth ahead before entering the maturity, or topping out, phase of the cycle.

Projects under construction and those scheduled to start in the next 12 months determine the amount of new supply entering the market over the next two years. The under construction number is at 1,117 projects with 141,302 rooms (up 26 and 24 percent year-over-year, respectively). The number of projects starting in the next 12 months is at 1,599 projects and 189,473 rooms, which is up 20 and 17 percent year-over-year, respectively. These stages are growing quickly, but the totals remain considerably below the peaks established during the previous cycle.

Barring any exogenous event, everything suggests that there are a few more years of sustained profitability ahead before the flow of new hotel openings could become problematic. This creates a significant window of opportunity for the industry considering that in the first quarter guestroom demand at a 4.2 percent growth rate is running four times greater than new supply growth and other operating metrics—occupancy, ADR, RevPAR, and profitability—are already at modern-day highs.

Currently, the hotel sector is an attractive real estate class for investors because of high demand growth and a relatively modest forecast for new supply in the next few years.

Impressive demand growth continues despite an economic slowdown in the first quarter, which was largely thought to be weather related, and a moderation of international tourism resulting from a stronger dollar.

Interest rates remain low, and the Fed’s hints of postponing increases until the fall bodes well for continued mortgage availability. Easy money has helped bolster transaction activity as increased buyer competition for prized assets has pushed up selling prices, making it more attractive for investors to build rather than to buy.

These signs guarantee that development will continue to accelerate until later in the decade, when the real estate cycle will eventually peak. That peak will be accompanied by a wave of consolidation activity driven by shareholders seeking higher returns, which could include corporate mergers, restructuring of real estate holdings into REITs, disposition of significant individual assets, and portfolio sales to equity groups.

Pipeline Growth Drivers
More than 75 percent of the 3,846 projects in the pipeline (not including casinos) are represented by two chain scales. Upper midscale, with 1,676 projects, is up 26 percent over last year, and upscale, with 1,249 projects, is up 24 percent. Many of these projects are prototypical designs that enter the pipeline in the start of the next 12 months stage. They are generally smaller properties with fewer than 200 rooms and have relatively short permitting and construction timelines, which allows them to move quickly through the pipeline. Upper midscale and upscale development will drive total pipeline growth through the remainder of the cycle’s expansion phase.

Of all the non-casino projects in the pipeline, 79 percent have made a branding decision. Although having fewer projects, upper upscale shows the largest year-over-year percentage growth rate—up 41 percent. Project counts for upper upscale usually accelerate when the expansion phase of the cycle is well underway. Projects are generally larger hotels, often part of mixed-use developments, have longer permitting and construction timelines, and usually enter the pipeline in the early planning stage. Taking three or more years from announcement to opening, projects open quite late in the cycle, sometimes even after industry-wide operating declines have set in.

Overall, demand growth is outpacing new supply coming online and is likely to continue to do so for the next two, perhaps three, years. The pipeline is growing but not yet at a fast enough pace to be problematic. Hotel
operating metrics are at modern-day highs and, barring any unforeseen event, should remain there, thus creating a solid two- to three-year window of sustained profitability ahead. In a few years, looking backward, these will be invariably regarded as halcyon days for hotel investors and operators.

Peter Martin is a special projects manager for marketing and sales at Lodging Econometrics.

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