In the lodging industry, the recovery from the Great Recession is complete. In Q2 2014, the construction pipeline posted a double-digit gain year-over-year (YOY) for the third consecutive quarter. At Q2 2014, the pipeline stands at 3,311 projects/421,387 rooms, an increase of 17 percent by projects and 20 percent by rooms YOY. For the past nine quarters, the pipeline has been increasing off the cyclical low established in Q1 2012.
Extending a 12-quarter uptrend, projects under construction are up an impressive 50 percent by projects and 55 percent by rooms YOY. Increasing for eight quarters, projects scheduled to start construction in the next 12 months are showing gains of 21 percent by projects and 25 percent by rooms YOY and stand at 1,354 projects/161,204 rooms.
Rising sharply, these counts are impacted by an influx of new project announcements (NPAs) into the pipeline, mostly upper upscale and upper midscale projects from 100 to 200 rooms. Many are “lifestyle” brands—newer, more contemporary designs of older brands aimed at attracting millennials. These projects will lead new supply growth from 2014 to 2016 and beyond. Early planning is showing decreases: 7 percent by projects and 4 percent by rooms. However, this is customary during the early years of a new real estate cycle.
In Q2 2014, Lodging Econometrics released its 2016 forecast for new supply for the first time, while slightly revising its projections for 2014 and 2015. New hotel openings in 2016 are forecast to be 871 projects/97,540 rooms. Since the average construction project takes 22 months from announcement to opening, the forecast is largely predicated on projects already in the pipeline and also accounts for a portion of the NPAs anticipated during the next year. Although trending upward at this time, pipeline and new hotel opening counts still seem below pace in this cycle compared to previous cycles.
Acceleration in Development Activity
After running at a slightly negative pace in Q1, the U.S. GDP rebounded smartly, hitting a 4 percent annual growth rate in Q2. Many economic indicators, including consumer confidence, are near cyclical highs. Job creation is gaining momentum, and total employment levels are at pre-recession highs. Demand is rapidly rising, while additions to new supply remain modest, sending monthly room revenues to higher highs. Remarkably, the occupancy rate could finish 2014 at a 16-year peak. With the assistance of a stronger economy, supply/demand pressures will further build and could cause a significant acceleration of NPAs into the pipeline over the next three years. An acceleration of NPAs would lead to a thrust of new hotel openings from 2017 to 2019 when the current real estate cycle should begin to peak.
Upscale and Midscale Dominate
As of Q2 2014, 62 percent of the total pipeline by projects are in the upscale and upper midscale chain scales. Three franchise companies dominate the pipeline: Hilton Worldwide with 648 projects/76,169 rooms, Marriott International with 638 projects/ 79,543 rooms, and InterContinental Hotels Group with 552 projects/56,388 rooms. Hilton’s pipeline is led by the upscale Hilton Garden Inn and the upper midscale Hampton Inn & Suites and Home2Suites. The brands that top Marriott’s pipeline are the upscale Residence Inn and Courtyard and the upper midscale Fairfield Inn and TownePlace Suites. InterContinental is concentrated in the upper midscale with Holiday Inn and Holiday Inn Express. These brand totals will expand further as more than half of the 684 unbranded projects currently in the pipeline are expected to choose a brand prior to opening.
Patrick “J.P.” Ford is an SVP of Lodging Econometrics; info@lodgingeconometrics.com.
