Lodging Sector Construction Hits New High

Mar 1, 2006 12:00 PM

The hotel construction market recently reached its highest total since 2000, growing to 3,067 projects with 415,977 rooms, according to Lodging Econometrics' 2006 report. Lodging Econometrics (LE), based in Portsmouth, N.H., is an authority on all hotel real estate, including the “Development Pipeline” and “The Sale and Transfer of Lodging Real Estate” nationwide.

With a fourth quarter 2005 increase representing the largest quarterly increase since the market hit bottom in 2003, LE expects the pipeline to continue to grow through the end of the decade, surpassing the record totals set in 1998 as early as next year.

Following are some highlights from the firm's recent forecast to summarize the present and future hotel construction market.

Clear confidence

With sentiments growing that rising interest rates will peak in 2006, lodging developers are shaking off any hesitancy about rising labor and material costs prevalent in the post-Katrina period.

Market highlights

Smaller projects in secondary and tertiary markets and outer suburbs of large cities are currently dominating the construction pipeline. As a result of this activity, LE has increased its supply side forecast for 2006 to 874 hotels (91,667 rooms), which represents a 2% gross growth rate before accounting for hotel closings and conversions to alternate uses. Pipeline projects scheduled to start construction in the next 12 months have already reached an all-time record high with 1,471 projects and 187,189 rooms. These projects are scheduled to come online in 2007-08.

Mixed-use developments on the rise

Because interest rates for consumer borrowing have been so low, some developers are adopting a different business model. Sometimes this means accessing borrowing power by configuring hotels with private residences or by pre-selling all or a portion of their guestrooms as condo hotel or timeshare units, which provides a large upfront cash infusion for developers. There are currently 100 “condo hotel” projects in the pipeline, another 125 are constructing private residences, and another 21 hotels will include some timeshare units.