Lodging Real Estate Trends – Executive Summary
Pipeline Breakout Is Accelerating.
With 3,645 Projects/460,551 Rooms the 2014 Total US Construction Pipeline stands at its highest level in six years. After a three-year bottoming formation, the Pipeline has now posted five consecutive quarters of double-digit Year-Over-Year (YOY) growth. In both the third and fourth quarters increases were particularly impressive, exceeding 20%. Although the breakout might appear robust, Pipeline totals are still a long way from the peak of 5,438 Projects/718,387 Rooms set in 2007.
Projects Under Construction, the most important predictor of near-term supply growth, has catapulted forward to 1,086 Projects/136,442 Rooms – the highest level in more than five years. Under Construction is up 37% by Projects and 34% by Rooms (YOY). Projects scheduled to Start Construction in the Next 12 Months have risen strongly to 1,351 Projects/160,061 Rooms, up 17% and 13% YOY respectively.
The growing number of projects in Early Planning is only just beginning. The cyclical bottom for projects in Early Planning just occurred in the second quarter of 2014. It bounced back smartly in the second half of the year, adding 221 projects, and ended 2014 at 1,208 Projects/164,048 Rooms.
Projects in Early Planning directly influence the number of hotels that will open three to five years outward. Projects that enter the Pipeline in Early Planning are generally larger hotels in downtown or resort locations. Most are Upscale select-service projects, while others are Upper Upscale and Luxury full-service hotels that are frequently part of mixed-use developments. Planning and permitting these larger, more complex projects is typically more protracted and also comes with longer construction periods. These projects generally open near the end of a real estate cycle, often times after the cycle has already peaked and begun to decline. Project counts in Early Planning are expected to spurt forward over the next two to three years and make significant additions to new supply towards the end of the decade.
New Openings Will Accelerate Late Decade
New supply growth bottomed in 2011 with the opening of only 347 Hotels/37,404 Rooms. The bottom in 2011 concluded a precipitous 75% decline in New Hotel Openings from a peak of 1,341 Hotels/154,257 Rooms established in 2008 at the onset of the Great Recession.
Since then, new supply growth has been slow and incremental. New Hotel Openings were a paltry 412 in 2012, 488 in 2013 and 557 hotels with 63,352 rooms in 2014. LE forecasts that just 726 new hotels will open in 2015 and 797 hotels in 2016. The sharpness of the decline and the prolonged nature of the economic malaise delayed the rekindling of hotel development and continues to cause sluggish supply growth.
Because the Pipeline is just beginning to breakout Total New Hotel Openings are not expected to peak until 2018-2019 as the typical hotel project takes an average of 22 months to migrate through the Pipeline before eventually opening as an addition to new supply.
The Hotel Real Estate Cycle
In the absence of any significant new supply the industry’s operating performance has been stellar. Occupancy should hit a modern-era high in 2015. Average Daily Room Rates (ADR) and Revenue Per Available Room (RevPar) are at record highs and should continue to set new records annually. Industry profitability has and will continue to be in a substantial “sweet spot.” Barring any exogenous event, the current cycle should deliver another two years of solid profitability growth through its expansion phase, and for perhaps an additional two years into the cycle’s maturity phase, before topping out around 2018-2019. Soaring profitability is the ideal scenario for sparking new development.
Other factors are also stimulating hotel development. The broader economic recovery is complete and is now thought to be poised for accelerated growth. Both business and consumer confidence has improved. Business and leisure travel is booming. Interest rates remain near historic lows and project financing is increasingly more available.
Good times for the industry should continue until near decade end. With the Pipeline only now just starting to breakout, it means there is still another three to four years, barring any unforeseen circumstances, before any significant new supply additions come online to brake rising hotel profitability.
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LE’s Construction Pipeline Trend Report for the US presents an unmatched review of lodging real estate
and development activity. Ideal for monitoring development growth trends, the report contains current and comprehensive views of the Construction Pipeline by Project Stage (Early Planning, Scheduled to Start in the Next 12 Months and Under Construction), LE’s Proprietary Three-Year Forecast for New Hotel Openings, current counts for Open & Operating Hotels (Census) and New Hotel Openings for the previous two years.
An LE Market Trend Report for any Individual Market will supply you with every lodging real estate fact needed about a particular market. Reports provide a summary of the Construction Pipeline as well as contain individual Hotel Records with full details on New Construction Projects, Brand Conversions, Announced Renovations, Open & Operating Hotels (Census), Distressed Hotels and Recent Transactions.
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