After being locked in a bottoming formation for nine quarters, the U.S. construction pipeline increased in 2013 to 3,020 projects with 382,958 rooms. This represents a year-over-year (YOY) increase of 10 percent by projects and 12 percent by rooms and is the first YOY double-digit upswing since the recession. The increase from the bottom in the second quarter of 2011 is significant because it starts the second leg of the new real estate cycle. At this stage, pipeline growth is expected to steadily increase as single asset and portfolio selling prices are at record highs. This signals a point where it will soon be cheaper to build new hotels than to buy existing ones. The industry-wide recovery of operating and profitability statistics and the slowly improving lender environment has stimulated an improvement in developer and investor sentiment.
Ninety percent of the pipeline is made up of select-service properties. Most are prototypical branded projects, which generally enter the pipeline as scheduled to start in the next 12 months and get into the ground quickly. These kinds of projects are up 35 percent by projects and 42 percent by rooms YOY. Practically all are branded, in urban center and suburban locations in the largest markets, and are under 200 rooms. There are fewer luxury and big box convention hotels with long development timelines in the pipeline. For this reason, the early planning stage continues to fall and has yet to bottom. It shows a YOY decrease of 16 percent by projects and 13 percent by rooms. Projects under construction have increased 26 percent by projects and rooms YOY.
The franchise companies with the greatest concentration of brands in the upscale and midscale categories increasingly control a higher percentage of the pipeline. At 613 projects and 75,495 rooms, Marriott has 20 percent of the total pipeline by projects, Hilton has 19 percent, and InterContinental Hotels has 17 percent. Marriott is the first company whose pipeline has recovered sufficiently to reach the 75,000-room plateau, a level that has not been reached by any company since the second quarter of 2009, four and a half years ago. Also noteworthy, in the fourth quarter of 2013, Marriott posted 149 new project announcements (NPAs) into the pipeline, nearly three times more than any other company, and at 49 projects, had the highest number of construction starts in the quarter as well.
New York City has the largest pipeline of any market in the country with 160 projects/ 27,464 rooms. When built out, New York’s census of open and operating hotels will expand a remarkable 30 percent by hotels and 26 percent by rooms. Other developer favorites are Houston (89 projects), Washington (86), Los Angeles (59), and Dallas (50). Of the five markets, all had occupancy rates above the national average. Only Washington, D.C., saw a YOY decline in demand growth, due primarily to federal budget cutbacks.
Annual construction starts have nearly doubled since the 2010 bottom but are still 50 percent less than the peak established in 2007. They currently stand at 759 projects with 87,169 rooms. Although NPAs are up 38 percent over the 2011 bottom, they are 59 percent below the 2007 peak. In 2013, there were 1,377 projects and 167,126 rooms announced.
Looking Ahead
The overall economic recovery from the Great Recession has been slow and sluggish. The fall from the previous peak was so significant and the financial crisis so deep and widespread that the recovery, although consistently up trending, is probably running at least a year behind the pace of recovery for other recessions. Although the economic metrics monitoring recovery are up trending slowly, the metrics for economic growth remain stagnant.
The same can be said for the industry’s operating and profitability metrics and for the construction pipeline too. They are recovering, but not growing as quickly as hoped for. The key to economic growth for the next few years is passing job creation policies that would push the GDP growth rate over 3 percent. This is also the key to increasing guest room demand, which will ultimately spark development activity.
That could more easily happen now that many political and economic issues, such as sequestration, debt ceilings, threats to close down the government, and disagreement about the Federal Reserve policies, have been somewhat mitigated. A few economic hurdles remain—further implementation of the Dodd Frank rules and a potential slowdown in emerging markets. The hope is that economic growth will become the agenda for the current Congress and the platform for aspiring political candidates.
Patrick “JP” Ford is an SVP of Lodging Econometrics; info@lodgingeconometrics.com.
