Cyclical lows in hotel openings and reduced financing for new hotel deals will continue to plague the industry in 2011, according to the Outlook on Real Estate Trends from Lodging Econometrics. Many developers assessed their project portfolios at year-end and concluded that development conditions will not change materially this year.
As a consequence, developers pushed a large number of their projects already in the pipeline from scheduled starts in the next 12 months back to early planning. Counts for scheduled starts decreased 15 percent by projects and 13 percent by rooms quarter-over-quarter, while early planning saw an 8 percent project and 6 percent room increase. In Q4, few new projects started construction. This resulted in a historic low of 449 projects/53,991 rooms for the under construction stage, which now accounts for just 14 percent of all projects in the total pipeline.
New hotel openings will remain in a bottoming trend over the next three years, as the pipeline continues to recede. For 2011, LE is now projecting just 446 hotels/46,343 to come online, a gross growth rate of 0.9 percent. That’s a fall-off of over two-thirds from the cyclical highs in 2008 and 2009. For 2012, LE’s forecast calls for 487 hotels/48,860 rooms to exit the pipeline as new supply. In 2010, 635 new hotels/70,849 rooms opened, just half of what opened in 2009, resulting in a supply growth rate of 1.5 percent.
Banks are not likely to finance new construction until most of their “distressed loans” are cleared from their portfolios and the lodging industry’s operating performance has improved. To increase profitability and asset value, occupancy, which showed only incremental increases during the second half of 2010, must make more substantial gains to drive up average room rates. It’s a slow process. Developers will likely be entrenched on the sidelines, and construction activity will be subdued at least into 2012.
The total U.S. construction pipeline is at a new cyclical low of 3,122 projects/372,813 rooms as of the end of Q4. Totals will drift further downward for the foreseeable future, as the unavailability of lending continues to curb new project announcements into the pipeline.
Construction starts are another casualty of scarce financing. For projects already in the pipeline, they reflect the rate of project migration forward towards construction. Only 422 projects/45,696 rooms were recorded in 2010, a low not seen in over a decade. With all that said, lodging demand is expected to continue to improve in 2011 and 2012.
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