U.S. Construction Starts Down: Survey

NEW YORK— The industry could be forgiven if it’s hard-pressed to decide whose word to take about real estate lending by U.S. banks: that of Federal Reserve Chairman Alan Greenspan; or UBS Warburg in its recent Semiannual U.S. Hotel Construction Analysis. During his recent testimony that was prepared for a Senate Banking Committee hearing, Greenspan reportedly reiterated his earlier observation that bankers and regulators are getting better at reducing risks and breaking a cycle of tighter lending in a slumping economy and, conversely, expanded credit in a recovery. But Greenspan’s assessment doesn’t jibe with findings in UBS Warburg’s first quarter 2001 hotel-construction survey. The updated assessment of lodging supply growth noted that tighter lending standards are making it increasingly difficult for hotel developers to obtain capital for new construction. However, UBS Warburg analysts maintained that there is a silver lining in this clouded situation: hotel supply growth will be correspondingly decreased, falling to just 2.0% in 2001 and possibly slowing to as little as 1.5% to 2.0% in 2002. In line with this forecast that was, in large measure, drawn from pipeline data provided by F.W. Dodge, UBS Warburg industry analyst Keith Mills contended that “supply is no longer the challenge facing the lodging industry. Today, it’s a matter of demand.” Underscoring this predicted downward trend in U.S. hotel construction were figures released for May 2001 indicating a 22.0% decrease in construction starts, amounting to an annualized pace of 59.4 million square feet, or an estimated 99,022 rooms added to the nation’s lodging supply, slightly above the figure of 95,256 rooms projected as of this past March 31. Furthermore, May construction levels this year were said to be 23% below April 2001 starts. Top Cities For Supply Growth On a destination-by-destination basis, it was noted that— among the 25 largest U.S. lodging markets— hotel-room supply growth this year is expected to be the highest in Seattle, Nashville and Boston, with all three cities posting gross supply growth in excess of 6.0%. Conversely, it was anticipated that St. Louis, Los Angeles and Denver would be posting the lowest levels of hotel supply growth in 2001. It seems most of the industry is falling into line with significantly decreased levels of development, perhaps with the notable exceptions of Marriott and, to a lesser extent, Hilton Hotels. To that end, the UBS Warburg report suggested that those chains in line for the lion’s share of new room openings this year include Hilton Garden Inn, Marriott Hotel, Hampton Inn and both Residence Inn by Marriott as well as Courtyard by Marriott. It was estimated that lodging chains owned by Marriott International should account for 22% of total new rooms coming on line in 2001, thereby increasing its market share. Chains owned by Hilton Hotels and Bass Plc are seen as accounting for 16% and 9%, respectively, of total U.S. hotel room openings this year. It was further noted that mid-price without F&B would see the greatest influx this year. Current expectations are that this segment will add nearly 24,000 rooms to its existing inventory. Not surprisingly, it was noted that casino- and theme-park-related hotel projects would add the least to the nation’s standing room supply, with something less than 2,700 rooms for 2001. Upper-Upscale Segment Growth Working with estimates of just over 400,000 more hotel rooms to be added to the nation’s ranks through 2003, it was suggested that the rate of rooms being developed at the upper-upscale level would ultimately outpace that of those coming on-line in the mid-price-without-food-and-beverage range by some 50%. Specifically, it was predicted that the top end of the industry would assimilate an additional 62,583 rooms, while the mid-price sector could receive 41,632 more rooms. Included in this latter set of figures are those hotel projects whose completion dates