The U.S. hotel industry is projected to add 739 new projects and 82,587 new rooms in 2015, according to a new forecast published by Portsmouth, N.H.-based Lodging Econometrics. If realized, this would represent a growth rate for new supply of 1.6 percent, continuing the slow but steady upturn over 2011’s cyclical bottom of 346 new projects and 37,193 new rooms.
Despite the supply growth, the hotel industry is still far away from the peak of 1,341 new projects and 154,258 new rooms set in 2008, a feat that will not likely be repeated until late this decade, if at all.
The 2015 forecast is contingent upon “in the pipeline” continuing to move forward at the current pace. As defined by Lodging Econometrics, “in the pipeline” is either in early planning, starting in the next 12 months or currently under construction.
2013 at a Glance
At mid-year, the total construction pipeline stood at 2,822 projects and 350,151 rooms, a modest 4 percent increase for projects year-over-year.
Projects in the construction phase have been on the rise for eight quarters and, at 646, that category is up 23 percent year-over-year. Meanwhile, rooms under construction are up 22 percent year-over-year at 81,531.
As for those developments expected to start in the next 12 months, projects are up 36 percent at 1,116, while rooms in that same phase are up 38 percent at 128,861 and have been trending upwards for four quarters.
On the other hand, projects in early planning are down 23 percent. Overall, the early planning phase currently stands at 1,060 projects and 139,759 rooms. This indicates that fewer luxury and upper upscale resort and city center projects are entering the pipeline.
Pipeline Projects Across the Spectrum
Currently, 91 percent of all projects in the pipeline are smaller than 200 rooms. Many are prototype projects, less complex to build and easily financed at community banks.
A disproportionately high volume of select service projects is common at the beginning of each new real estate cycle as the industry awaits a more complete recovery of the capital markets, writes Lodging Econometrics. It’s too early in the new cycle for larger projects that require institutional financing, as neither the economy nor capital markets have progressed sufficiently. And with the exception of a few markets, neither guest room demand nor room rates have recovered sufficiently either, according to the report.
For development projects that have already selected a brand, the mid-year report shows that the upscale and upper midscale chain scales combine for 75 percent of the projects and 71 percent of the rooms in the pipeline. Only 574 projects, or 20 percent of the pipeline, have yet to make a branding decision.
When decisions are formalized, history shows that 75 percent of those decisions will be in either upscale or upper midscale brands.
Looking Ahead
Growth in the pipeline, although increasing modestly, is sluggish by historic standards. There is no visible accelerator for development on the horizon, according to Lodging Econometrics.
The mid-year report states that due to the severity of the Great Recession compared to other lodging real estate cycles, this recovery period will be prolonged a minimum of two extra years before hitting its stride, if in fact developer activity eventually does accelerate into a higher gear.
Researchers at Lodging Econometrics write that the hurdles to a normal acceleration in development are substantial. They cite that the economy is still recovering, the administration and the Congress are at “do-nothing” loggerheads, new regulatory policies and capital market improvements languish, economic growth policies are few and unemployment levels and consumer sentiment are problematic. Thus, lodging demand growth and the rate of price expansion is slowing, and transaction volume is poor.
– John McCurdy