Favorable economic conditions, record-setting operating metrics, and a positive outlook for the next few years have combined to make this an opportune time for hotel developers. The hotel construction pipeline surged forward to a five-year high in Q3 with 3,516 projects and 443,936 rooms. The pipeline has posted double-digit year-over-year (YOY) increases for four consecutive quarters in both projects and rooms. YOY increases are up 25 percent and 24 percent, respectively, in the third quarter, signaling a breakout into the expansion phase of the current real estate cycle, which is likely to continue another two to three years.
With 1,062 projects and 134,292 rooms being built, construction is up a booming 50 percent by projects and 46 percent by rooms since this time last year. Projects scheduled to start in the next 12 months are also strong, up 36 percent and 34 percent, respectively, at 1,375 projects and 165,085 rooms. New project announcements are propelling pipeline totals upward and will continue to gallop ahead in the next few years, causing the pipeline to rapidly accelerate. Annualized four quarter totals for new project announcements have hit levels not seen since early 2009.
Green Light for Development
Developers are extremely positive, with conditions being near perfect. In Q3, the economy grew at a better than expected annualized rate of 3.5 percent. Industry operating statistics are very strong, and 2014 will be the fifth consecutive year when guestroom demand growth has exceeded supply growth and the fourth year in a row when supply growth has been 1 percent or less. At year-end 2014, occupancy will have reached a 17-year high. Both average daily rate and revenue per available room will finish at record highs.
Because of the industry’s favorable metrics, lenders are increasingly more attracted to hotel investment, making fund-raising easier to access by developers. Interest rates are near record lows and are expected to remain so at least through mid-2015. Selling prices are rising rapidly as upscale and upper midscale branded hotels remain investor favorites.
Top Markets, Franchise Companies
Guestroom demand is explosive, with 23 of the top 25 markets running above the nation’s average occupancy rate of 65.9 percent. Development also is thriving in these markets, which account for 40 percent of all guestrooms in the pipeline.
New York, with 176 projects and 29,775 rooms, has the largest pipeline in the country, and when built out, it would result in a hefty 28 percent increase to the city’s current supply. A booming, sprawling city spurred by the oil industry, Houston has 133 projects and 14,982 rooms. Washington, D.C., with 87 projects and 14,701 rooms and Los Angeles with 65 projects and 13,365 rooms follow. Miami, a growing vacation and second-home destination for the Latin American business and tourist class, is next, having 63 projects and 12,037 rooms.
Leading the pipeline is Marriott International with 667 projects and 82,502 rooms, Hilton Worldwide with 683 projects and 79,966 rooms, and InterContinental Hotels Group (IHG) with 578 projects and 59,778 rooms. The pipeline for these three franchise leaders is up significantly since last year. Among developers who already have made a branding decision for their project, 55 percent of them have selected a flag affiliated with one of these three companies.
Key upscale and upper midscale brands are the industry pacesetters in the early years of the development cycle’s expansion phase. For Marriott, its leading brands are Courtyard, Residence Inn, SpringHill Suites, Fairfield Inn, and TownePlace Suites. For Hilton, it’s Hilton Garden Inn, Homewood Suites, Home2 Suites, and Hampton Inn & Suites. IHG’s leading brands are Holiday Inn Express, Holiday Inn, Indigo, Staybridge Suites, and Candlewood Suites. Other upscale and upper midscale lifestyle brands favored by developers include Aloft and Element by Starwood and Hyatt Place.
Patrick “J.P.” Ford is senior vice president and director of business development at Lodging Econometrics; info@lodgingeconometrics.com.
