NATIONAL REPORT—The total U.S. hotel construction pipeline at the end of 2015 was 4,413 projects and 546,135 rooms, becoming the highest year-end total since 2008 but still below the 2007 cyclical high of 5,438 projects and 718,387 rooms, according to Lodging Econometrics (LE).
Based on LE’s trend report, there are 1,312 projects currently under construction, up 226 projects, or 21% year-over-year (YOY). Projects scheduled to start in the next 12 months, at 1,926 projects, have shown significant increases, adding 575 projects and are up 43% YOY. Projects in early planning, with 1,175 projects, decreased by 33 projects and are down 3% YOY.
“Our report shows that although there was a 20% increase in 2015 over 2014, it has been a steady climb for the new-construction pipeline,” said Bruce Ford, SVP and director of global business development, LE. “We’re still more than 200,000 rooms away from that. We still have quite a way to go to reach historic peak levels of new supply.”
LE reported that the five U.S. markets with the largest construction pipelines are New York (204), Houston (167), Dallas (121), Los Angeles (96) and Washington, DC (85). Among these markets, New York has more than half (102) of its pipeline currently under construction. Dallas (44) and Los Angeles (28) added the most projects last year.
LE also indicated the top five chain scales with the most projects in the pipeline are upper-midscale (1,775), upscale (1,127), unbranded (713), upscale (397) and upper-upscale (173). Approximately 251 upscale and 398 upper-midscale properties will open in 2016. In 2017, 333 upscale and 398 upper-midscale projects are slated to open. In 2018 and beyond, the most properties slated to open are in the upper-midscale chain with 898, followed by upscale with 543.
“The big trend is building select-service hotels in urban centers,” said Ford. “This development trend encompasses the chain scales of upscale and upper-midscale and represent the highest new-construction growth rate in the country. There continues to be a compelling story for developers to continue building those scales in higher rate, urban centers.”
Among all brands, Holiday Inn Express leads with 373 hotels in the new-build pipeline. The next four with the most projects in the pipeline are Hampton Inn & Suites by Hilton/Hampton Inn by Hilton (331), Home2 Suites by Hilton (269), Fairfield Inn & Suites (248) and Residence Inn by Marriott (170). “Upscale and upper-midscale chains will, have been and continue to be the largest pipelines,” said Ford. “These brands are economically friendly for developers.”
The recent increase in new-builds can be attributed to a variety of factors. The recovery of the U.S. economy following the past recession, in particular, has played a major role in new-supply increase, according to Alex DelMonte, president of the DelMonte Hotel Group, a Rochester, NY-based owner and operator.
The upscale Hilton Garden Inn Pittsburgh Airport South-Robinson Mall, which is owned and managed by DelMonte Hotel Group, opened in February. “Hotel demand has outpaced supply and, as a result, developers are finding pockets of opportunity,” said DelMonte. “We believe that we may be reaching equilibrium in the supply and demand of new rooms and would not be surprised to see a plateau or decline in rates and occupancy over the next couple of years.”
Additionally, low-interest rates for real estate development is increasing lending practices by financial institutions, observed Michel Gibeault, VP, business development, High Construction Company, a Lancaster-PA based commercial builder in the mid-Atlantic region. “The number-one reason is cheap money,” he said. “Developers are also taking advantage of antiquated products still available on the market.”
For Alex Jansen, president, Jansen Construction Company, hotel development is dependent on having debt partners to fund the significant upfront investment costs. Based in Oregon City, OR, his company, part of Jansen Development Corporation, specializes in building limited-service, franchised properties.
“The last downturn resulted in a significant constriction of available lenders and a subsequent slowdown in new product being brought to market,” said Jansen. “As the economy improved, and lenders re-entered the market because of the lapse in new development during the downturn, the existing inventory of hotel rooms in certain markets had become either dated or insufficient to meet demand.”
Gibeault, Jensen and DelMonte agreed that both Hilton Worldwide and Marriott International are leading the way among the global chains. “Marriott and Hilton brands are the market leaders in our opinion due to consistency of product quality and the significant customer loyalty to each brand,” said Jensen. Gibeault added, “Both are two dominant players that are aggressive about rolling out new hotels and brands.”
Regarding the outlook of 2016, DelMonte remains cautiously optimistic. His firm, which recently opened the Hilton Garden Inn Pittsburgh Airport South-Robinson Mall, plans to continue searching for opportunities within its target markets in the Northeast, Midwest and Mid-Atlantic regions.
“Our strong relationship with the brands and our lending institutions will allow us to continue to expand our portfolio over the next year,” said DelMonte. “We do believe that the development industry, at large, will see a slowdown in new construction this year as interest rates rise and bank lending starts to become more stringent. This dynamic should present itself as an opportunity for well-capitalized developers to make smart investments over the next few years.”
For Sam Cicero Sr., founder of Cicero’s Development Corp., business has recovered since the Great Recession. “We never expected it to rebound as quickly as it has,” he said. “We do expect the new-build market to take a breather in 2016, with rates returning to more normal levels. Renovations, including same-brand upgrades as well as transformations to entirely different brand flags, are a far more promising area in 2016. Successful brands are proactively upgrading their standards based on what their targeted guest base wants today and in the future.”
Ford stated that he anticipates another solid operating performance year in 2016, which would drive another 20% growth in total for the new-build pipeline. New-construction growth this year would then drive openings in 2018 and 2019. “2016 will have more openings than 2015 and the most openings since 2008, but it’s not a crippling supply growth number,” he said.