The U.S. RevPAR recovery is well underway. With operating fundamentals now nearing or surpassing the prior peaks of 2007 and room demand at an all time high, industry participants feel positive. But, as always in the lodging industry, positive news from the operators causes developers to take note. So it should come as no surprise that the hotel development pipeline is increasing as well. In May STR reported 74,000 rooms under construction, a year-over-year increase of 22 percent. Of the 74,000 rooms 42,000 are expected to open this year.
The majority of the under-construction rooms are found in the limited-service brands, with 47,000 rooms in the upscale and upper midscale chain segments. These brands drive the expansion of the major hotel companies and are the preferred investment vehicles of real estate buyers. And while the luxury segment has performed exceptionally well in this upturn, there are only 11 projects and 5,000 rooms under construction. The majority of these rooms can be seen in New York City, which also boasts the single largest construction pipeline of the Top 26 metropolitan statistical areas (MSAs). It is interesting to note that despite the positive RevPAR growth some markets, most notably Oahu and San Francisco, have almost no development activity. Local ordinances and lack of land are the hindering factors there.
Las Vegas, the developer darling of the early 2000s, doesn’t have any project under construction either. Rumors and plans abound, though, as our pipeline shows 18 projects with some 14,000 rooms in the planning and final planning phases. Not all of these projects will come to fruition, but it is a fair bet to assume that Las Vegas will see some groundbreaking ceremonies in the near future.
Other markets with strong under construction pipelines are Nashville (1,963 rooms), Washington, D.C. (3,302 rooms), and Denver (1,505 rooms). These new rooms will obviously have some impact on marketwide occupancies. In Nashville and D.C. the bulk of rooms is associated with headquarter hotels next to the convention center, so it will be interesting to note if an increase in room demand will go hand in hand with this room supply increase.
The total active pipeline in May stood at 322,000 rooms. The open dates of the projects are skewed toward 2016 and beyond (145,000 rooms). We currently estimate that 86,000 rooms will open in 2014 and 49,000 rooms will open in 2015. But as performance metrics improve further some of these projects will likely be moved up and construction will commence sooner.
Overall, the under construction pipeline shows robust growth closely following the U.S. demand and RevPAR recovery. But it is probably fair to assume that developers are continuing to look at even more markets and street corners and planning more projects and that supply will grow for the foreseeable future.
Jan Freitag is the senior vice president of strategic development at STR.
