The total construction pipeline continued its upward trend in Q1 2014 and now stands at 3,226 projects/407,235 rooms, up 13 percent and 15 percent, respectively, year-over-year (YOY). For the second consecutive quarter, the pipeline posted a double-digit percentage increase after being bogged down in a prolonged bottoming formation since mid-2011.
Projects under construction, 885 projects/114,337 rooms, are up significantly YOY, 40 percent by projects and 43 percent by rooms. Projects scheduled to start in the next 12 months, 1,327 projects/161,748 rooms, are up a solid 32 percent by projects and 37 percent by rooms.
Early planning dropped 17 percent by both projects and rooms YOY. The pipeline at this stage of the real estate cycle is heavily defined by smaller upscale and midscale projects that often do not enter the pipeline in the early planning stage. The hotel designs are generally prototypical and have shorter permitting and construction timelines. Early planning project counts will accelerate when larger mixed-use projects, which take longer to complete, are developed later this decade.
Upscale and midscale developments currently represent 70 percent of the branded pipeline (excluding casinos). Unbranded hotels currently in the pipeline total 675 projects/111,835 rooms. About 90 percent of these projects will choose a brand prior to opening. At least three-quarters of these projects will be in the upscale or midscale chain scales.
New project announcements entering the pipeline, 427 projects/54,256 rooms, are at their highest point since the 2011 bottom following the Great Recession. Another bellwether of the recovery phase, construction starts also rose to a high point in the quarter with 213 projects/27,741 rooms getting underway. Both metrics should accelerate forward throughout the decade.
The country’s underlying economy is thought to be strengthening despite an unusually poor performing winter season. The Federal Reserve has begun to cut back its stimulus program, effectively making more capital available to the private business sector. Consequently, many experts predict by year-end GDP will be running at a growth rate above 3 percent.
Lending is increasingly more available, interest rates remain low, transactions are picking up, and Wall Street M&A activity is accelerating. Lodging operating stats also have rebounded: Average daily rates and revenue per available room have surpassed prerecession heights, and occupancy and profitability are projected to reach those levels later this year. These signs all point to the further recovery of the pipeline and provide impetus for an even faster pace of growth.
Top Markets
Development is concentrated in the nation’s top 25 markets with 44.2 percent of all pipeline rooms currently under construction located in those big cities. There are now 18 markets with more than 20 projects in the pipeline.
New York City is the top market with a remarkable 180 projects/30,304 rooms in the pipeline, half of which are already under construction. (See Top Markets by Room Count chart.) It has the largest pipeline in the world and a pipeline-rooms-to-census ratio of 28.6 percent, meaning when the New York pipeline is built out, the present number of open hotels will increase by almost a third. Economic growth has taken off as a number of previously fast-growing foreign economies, many with falling currencies, have slowed considerably, making the United States an even greater refuge for global investors.
With less than half the pipeline rooms of New York, Washington follows next with 85 projects/14,948 rooms. The market is growing rapidly, fueled by an expansion of businesses and consulting firms servicing various government agencies.
Houston, with its steadfast energy sector, has 100 projects/11,375 rooms. Los Angeles with 60 projects/11,113 rooms and Chicago with 42 projects/9,648 rooms are next, followed by Miami, with 54 projects/8,998 rooms.
Companies and Brands
Marriott has the most rooms in the pipeline with 613 projects/75,982 rooms. Its largest pipeline brand is Residence Inn with 126 projects/16,846 rooms and a build-out-to-current-census ratio of 22 percent. Hilton Worldwide follows with 623 projects/72,530 rooms. The Hilton Garden Inn, 104 projects/14,488 rooms, has its largest build-out-to-census-ratio at 20 percent. Holiday Inn Express, by InterContinental Hotels Group, has the most projects of any brand in the pipeline at 292 projects/26,416 rooms.
Best Western is a brand to keep an eye on. The main brand already has expanded to include the upscale Best Western Premier and the upper midscale Best Western Plus and recently has introduced a new midscale extended-stay prototype. The company will focus more on new construction and has recently reoriented and enlarged its development team to aggressively grow the four Best Western products across three chain scales.
Patrick “J.P.” Ford is a senior vice president of Lodging Econometrics. For more information, email info@lodgingeconometrics.com.
