Lodging Update

Oct 1, 2006 12:00 PM, By Ellen Parson, Managing Editor

Of all the segments that make up the U.S. economy, the lodging industry was one of the most — if not the most — severely crippled after the 9/11 terrorist attacks. After hitting an all-time low for new hotel and motel construction in 2002, it looks like the long-awaited recovery of this sector is finally coming to fruition. In fact, to say that it's poised for growth is an understatement, when you look at the latest numbers from the nation's leading construction economists and lodging experts. So far this year, lodging has shown the largest gain in the value of starts compared to any other major category tracked by Reed Construction Data, based in Norcross, Ga. In fact, the actual percentage change from January through May of this year vs. the same period in 2005 is a phenomenal 146.3% increase.

Characterizing hotels and motels as the “hottest market in the country right now,” Jim Haughey, director of research and analytics for Reed Construction Data, says his firm's records through August 2006 show that the contract value of starts of new hotels started in the first eight months of the year is double what it was in 2005. “Last year, I think it was up 21% for the whole year,” he says. “This year, it's going to be much better than that. There will be a little bit of growth next year, but the starts are going to start tapering off. However, construction activity will continue for at least 18 months after that — so it's a very good year to get on one of those jobsites.”

Thanks to occupancy rates steadily climbing over the last few years, supply is nowhere near demand yet, Haughey notes. Therein lies the need for new construction. Jan D. Freitag, vice president of Smith Travel Research, an independent research firm based in Hendersonville, Tenn., that provides data analysis to the lodging industry and publishes the Dodge Construction Pipeline in conjunction with McGraw Hill, agrees. “The U.S. hotel industry is at an interesting point in its history, because of the severe imbalance between supply and demand — demand being rooms being sold to leisure and business travelers and supply meaning the number of new rooms added to the inventory.”

Citing the most recent numbers (August 2006), Freitag notes there has been an increase in new rooms of 0.3% compared to the historic average of 2.1% while the number of rooms sold increased 1.8% compared to the average of 2.1% historically. “The imbalance between the 0.3 and the 1.8 is what's driving good times for the U.S. hotel industry right now,” he says.

This supply shortage is a reality of the post-9/11 world, continues Freitag. What happened to construction? “A lot of bank owners, lenders, and developers got really skittish with the hotel industry because they saw how much it was hurt after 9/11 so they stopped building. We saw this decrease in new supply every year, and we finally hit bottom.”

This caused existing hotels to do very well, despite the lack of new construction. “We made more money in the hotel industry last year than we ever did before — something like $22.6 billion in profits,” he says. “That got a lot of people's attention. So now they're building again. If you talk to Hilton, Marriott, or other brands, they have the largest pipeline in the works ever.”

So large is the pipeline, in fact, that Smith Travel Research reported it was tracking roughly 600,000 rooms in the U.S. pipeline through the end of August, if you include those in the preplanning, planning, final planning, and under construction phases — 162,000 of which are currently under construction.

In its mid-year report to the lodging industry, Portsmouth, N.H.-based Lodging Econometrics (LE), an industry authority for hotel real estate, looks beyond 2006, releasing its supply side forecast for 2008. In this report, LE forecasts that 1,079 new hotels will open in 2008, featuring 131,517 rooms (see Table below). This represents a 2.8% gross addition to supply, prior to any hotel removals from the census for conversion to other real estate usage. LE also made minor adjustments to its '06 and '07 forecasts after reviewing more than 3,400 projects in the pipeline with individual developers and re-verifying anticipated construction starts and completion dates with various brand managers.

“Construction starts for the last four quarters accelerated to 976 hotels/125,540 rooms, a 50% year-over-year increase, and the highest level for this cycle,” says Patrick Ford, LE's president. “It reflects a higher pace of new project announcements over the last six quarters and is an indicator that projects are now migrating forward more rapidly through the pipeline.”

Confirming this notion based on what he's seen and heard from his organization's members, Joe McInerney, president and CEO of the American Hotel & Lodging Association, based in Washington, D.C., expects to see significant construction starts the latter part of this year and early next, predicting that supply won't catch up to demand until at least 2008.

“We're coming out of the recession a little bit later than anyone anticipated, but the economy is starting to flourish,” he says. “When companies are doing well, they're going to start sending more business travelers out. Attendance at trade shows is also ahead of the last couple of years, and the rebirth of the international traveler is coming back to the United States — in part because of the value of the euro and pound to the dollar. Together, these make for a healthy opportunity to build hotels because the demand now is way ahead of the supply.”

**Table: Construction Pipeline at 2Q06 — Forecast for New Openings**
	Hotels	Rooms	Gross SupplyIncrease (%)
2008 (E)	1,079	131,517	2.8
2007 (E)	1,082	119,426	2.6
2006 (E)	809	85,747	1.9
2005 (A)	657	70,827	1.6
2004 (A)	555	58,420	1.3
A=Actual, E=estimated
Source: Lodging Econometrics