Lodging Real Estate Trends – Executive Summary
Construction Pipeline Spurts to the Upside. Marriott Delivers Big Gains.
After being locked in a bottoming formation for nine quarters, the Construction Pipeline increased in 2013 to 3,020 Projects/382,958 rooms, a Year-Over-Year (YOY) increase of 10% by projects and 12% by rooms. It’s the first YOY double-digit increase since before the recession.
The volume bounce from the 2Q11 bottom is significant because it starts the second leg of the new real estate cycle where Pipeline growth is expected to steadily increase as single asset and portfolio selling prices are now at record highs, signaling the point where it will be cheaper to build new hotels than to buy existing ones.
The improvement in developer and investor sentiment is stimulated both by the industry-wide recovery of operating and profitability statistics and a slowly improving lender environment in a sluggish economy that still functions considerably below potential.
Pipeline Stage and Franchise Company Growth
Ninety percent of the Pipeline is made up of select service properties. Practically all are branded, in urban center and suburban locations in the largest markets and are under 200 rooms. Most are prototypical branded projects, which generally enter the Pipeline in the Scheduled to Start in the Next 12 Months stage and get into the ground quickly. Scheduled to Start in the Next 12 Months is up 35% by projects and 42% by rooms YOY. Projects Under Construction have increased 26% by projects and rooms YOY. There are fewer Luxury and “big box” convention hotels with long development timelines in the Pipeline. For this reason, the Early Planning stage continues to fall and has yet to bottom. It shows a YOY decrease of 16% by projects and 13% by rooms.
The Franchise Companies with the greatest concentration of Brands in the Upscale and Midscale categories increasingly control a higher percentage of the Pipeline. At 613 projects and 75,495 rooms; Marriott has 20% of the Total Pipeline by Projects, Hilton has 19% followed by 17% for InterContinental Hotels. Marriott is the first company whose Pipeline has recovered sufficiently to reach the 75,000 room plateau, a level that has not been reached by any company since 2Q09, four and a half years ago! Also noteworthy, in 4Q13 Marriott posted 149 New Project Announcements (NPA’s) into the Pipeline, nearly three times more than any other company, and at 49 projects, had the highest number of Construction Starts in the quarter as well.
Internal Pipeline Metrics on the Increase
Annual Construction Starts, which were 759 Projects/ 87,169 Rooms in 2013, have nearly doubled since the 2010 bottom but are still 50% less than the peak established in 2007.
For NPAs into the Pipeline, in 2013 there were 1,377 Projects/ 167,126 Rooms announced. Although NPAs are up 38% over the 2011 bottom, they are 59% below the 2007 peak.
The overall economic recovery from the Great Recession has been slow and sluggish. The fall from the previous peak was so significant and the financial crisis so deep and wide-spread that the recovery, although consistently uptrending, is probably running about two years behind the pace of recovery for other recessions. Although the economic metrics monitoring recovery are uptrending slowly, the metrics for economic growth remain stagnant.
The same can be said for the industry’s operating and profitability metrics and for the
Construction Pipeline too – recovering, but not growing as hoped for. The key to economic growth for the next few years is enacting job creation policies that would boost the GDP growth rate over 3%. It’s also the key to increasing guest room demand which will ultimately spark development activity.
A few economic hurdles remain: further implementation of the Dodd Frank rules and a potential slowdown in emerging markets. With the decks clearing, the hope is that economic growth will become the agenda for the current Congress and the platform for aspiring political candidates.
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LE’s Construction Pipeline Trend Report encapsulates all US lodging development activity, with hotel project and room counts for the Pipeline by stage (Under Construction, Starts in the Next 12 Months, Early Planning), as well as for LE’s proprietary Three-Year Forecast for New Hotel Openings with projected supply growth rates. Two years of Prior Hotel Openings and current supply counts for Open and Operating Hotels (Census) are also included.
This macro-overview is essential for assessing future supply growth for strategic planning and decision-making.
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