With 3,645 projects/460,551 rooms, the 2014 total U.S. construction pipeline stands at its highest level in six years. After a three-year bottoming formation, the pipeline has now posted five consecutive quarters of double-digit year-over-year (YOY) growth. Increases were particularly impressive in both the third and fourth quarters, exceeding 20 percent. Perspective is necessary, however, because although this breakout might appear robust, pipeline totals are still a long way from their peak of 5,438 projects/718,387 rooms set in 2007.
Projects under construction, the most important predictor of near-term supply growth, has catapulted to 1,086 projects/ 136,442 rooms—the highest level in more than five years.
Under construction numbers are up 37 percent by projects and 34 percent by rooms (YOY). Projects scheduled to start construction in the next 12 months have risen to 1,351 projects/160,061 rooms, up 17 percent and 13 percent YOY, respectively.
The growing number of projects in the early planning stages is only just gaining speed. The cyclical bottom for projects in early planning occurred very recently in the second quarter of 2014. It bounced back smartly in the second half of the year, adding 221 projects, and ended 2014 at 1,208 projects/164,048 rooms.
Projects in early planning directly influence the number of hotels that will open three to five years outward. Projects that enter the pipeline in early planning are generally larger hotels in downtown or resort locations. Most are upscale select-service projects; the remaining are upper upscale and luxury full-service hotels. All are frequently part of mixed-use developments. Planning and permitting these larger, more complex projects is typically more protracted and also comes with longer construction periods. These projects generally open near the end of a real estate cycle, oftentimes after the cycle has peaked and already begun to decline. Project counts in early planning are expected to spurt forward over the next two to three years and make significant additions to new supply toward the end of the decade.
Even More New Openings to Come
New supply growth bottomed in 2011 with the opening of only 347 hotels/37,404 rooms. The bottom in 2011 concluded a precipitous 75 percent decline in new hotel openings from a peak of 1,341 hotels/154,257 rooms established in 2008 at the onset of the Great Recession.
Since then, new supply growth has been slow and incremental. New hotel openings were a paltry 412 in 2012, 488 in 2013, and 557 hotels with 63,352 rooms in 2014. LE forecasts that just 726 new hotels will open in 2015 and 797 hotels in 2016. The sharpness of the decline and the prolonged nature of the economic malaise delayed the rekindling of hotel development and continues to cause sluggish supply growth today.
It is worth noting that the pipeline is just beginning to break out, and because the typical hotel project takes an average of 22 months to migrate through the pipeline before eventually opening as an addition to new supply, total new hotel openings are not expected to peak until 2018-2019.
The Hotel Real Estate Cycle
In the absence of any significant new supply, the industry’s operating performance has been stellar. Occupancy should hit a modern-era high in 2015. Average daily room rates (ADR) and revenue per available room (RevPAR) are at record highs and should continue to set new records annually. Industry profitability has been and will continue to be in a substantial “sweet spot.” Barring any exogenous event, the current cycle should deliver another two years of solid profitability growth through its expansion phase, and for perhaps an additional two years into the cycle’s maturity phase, before topping out around 2018-2019. Soaring profitability is the ideal scenario for sparking new development.
Other factors are also stimulating hotel development. The broader economic recovery is complete and is now thought to be poised for accelerated growth. Both business and consumer confidence has improved. Business and leisure travel is booming. Interest rates remain near historic lows, and project financing is increasingly more available.
Good times for the industry should continue until near decade end. With the pipeline only now starting to break out, there are still another three to four years, barring any unforeseen circumstances, before any significant new supply additions come online to impede rising hotel profitability.
Patrick “J.P.” Ford is an SVP of Lodging Econometrics; info@lodgingeconometrics.com
