New hotel openings in the United States continue to be in a slow but steady uptrend since 2011’s cyclical bottom of 346 projects (37,193 rooms). Lodging Econometrics’ forecast for new openings in 2015, at 739 projects (82,587 rooms), represents a growth rate for new supply of 1.6 percent. Despite these increases, the industry is still far away from the peak for new openings of 1,341 projects (154,258 rooms) set in 2008.
When calculating the 2015 forecast, LE considered two factors: that hotels already in the pipeline will continue to migrate forward at the existing pace established, and that the uptrending steady volume of smaller economy through upper upscale new project announcements will continue to flow into the pipeline.
At mid-year, the total U.S. construction pipeline stands at 2,822 projects (350,151 rooms)—a modest 4 percent increase for projects year over year (YoY). Projects under construction have been on the rise for eight consecutive quarters. At 646 projects and 81,531 rooms, they are up 23 percent and 22 percent YoY, respectively. Projects expected to start construction in the next 12 months are up 36 percent at 1,116 projects. Rooms, which have been trending upward for four consecutive quarters, are up 38 percent YoY at 128,861. There are 1,060 projects (139,759 rooms) in early planning, down 23 percent YoY. This indicates that fewer luxury and upper-upscale resort and city-center projects are entering the pipeline.
Projects with less than 200 rooms represent 91 percent of the current pipeline. A disproportionately high volume of select-service prototype projects is common at the beginning of each new real estate cycle as the industry awaits a more complete recovery of the capital markets.
For projects in the pipeline that have already selected a brand, the mid-year report shows that the upscale and upper-midscale chain scales account for 75 percent of the projects and 71 percent of the rooms. Twenty percent of the pipeline (574 projects) has yet to make a branding decision. When decisions are finalized, history shows that approximately 75 percent of those decisions will be for either upscale or upper-midscale brands.
Although uptrending modestly, growth in the pipeline is sluggish by historic standards. Due to the severity of the Great Recession, there is no visible accelerator for development on the horizon. Compared to other lodging real estate cycles, this cycle seems destined to be prolonged at least two extra years before hitting stride.
The hurdles to acceleration in development are substantial. The economy is still recovering. The Administration and Congress are at “do nothing” loggerheads. New regulatory policies and capital market improvements languish, investor tolerance for risk taking is low, and economic growth policies are few, hence unemployment levels and consumer sentiment are problematic. Lodging demand growth and the rate of price expansion are slowing. Transaction volume is poor. In the next few years pipeline growth will be only modest. If the pace of growth accelerates it won’t likely start until early in the second half of the decade, at the earliest.
Patrick “JP” Ford is an SVP of Lodging Econometrics; firstname.lastname@example.org.