Supply continues to grow in the face of an economic
slump. But the experts say overbuilding is not
a concern, even as demand softens.
ity industry managing partner, says, “What is important about
that number,” he says, “is that it represents more project delays
than project cancellations.”
Hanson notes that the percentage of delayed construction
starts is likely to go up in 2009 as developers attempt to secure
funding this year, although his firm has yet to do the calculations. Projects that broke ground in 2008, he points out, probably secured financing back in 2006 and 2007.
“There are developers with hotels currently in the planning
stages that will start to go to market for financing, even in the
second half of the year, believing it will be a quick turnaround,”
Hanson says. “Many of those developers will find it will take
longer, so those projects will be postponed.”
For both 2007 and 2008, PwC calculates demand growth of
1.2%, while net supply grew by 1.4% in 2007 and will grow by
2.1% in 2008. (The long-term average for supply growth from
1988 to 2007 is 2.1%.) That imbalance between supply and
demand will lead to a 50-basis-point decline in occupancy, landing at 62.6% by year’s end. Hanson concedes that a half-point
drop is significant; excluding 2001, the last time the industry witnessed a decrease that steep was 1998. However, the PwC partner says that the US occupancy level this year will be relatively
high, though lower than in 2007. Moreover, the industry is still
on track for average daily rate growth.
“Our forecast for ADR growth is 5.4% for 2008. The long-term average is 3.3%,” he says. “Yes, we are going to lose some
occupancy, but there will be favorable rate increases. If we look
at the past couple of years, the increases have been large. In
2006, rates went up by 7.5%, and in 2007, by 5.9%. So our 5.4%
seems disappointing relative to the past few years, but it is still a
very favorable rate of growth.”
In February, Smith Travel Research recorded an active
pipeline—including rooms in the construction, final planning and
planning stages—of 648,882 rooms, up 107,159 units or 19.8%,
year over year. Hotel rooms under construction totaled 198,244, a
jump of 15.7%. The final planning category, meanwhile, saw the
largest increase, leaping more than 101% to 109,311 from 54,172
a year earlier. Projects on the drawing board had a more modest
uptick of 8%, going from 316,138 to 341,327 rooms.
Even though a near 20% increase in the active pipeline seems
huge, STR vice president Jan Freitag points out that nearly half
of the rooms in that category come from the final planning stage,
which includes projects nearing groundbreaking. In other
words, developers may decide to delay the actual start of the
project as the economy continues to slump, thereby keeping
those rooms out of the inventory.
“The final planning stage encompasses everything up to the
point when the shovel hits the ground,” the Hendersonville, TN-based VP says. “There are a lot of projects that get the approvals.
You talk to the city, you talk to the architect, and you talk to the
brand company. You even talk to the bank, and then say, ‘Okay,
I think we’re ready to go, but we might be building into a downturn so why don’t we just hold off?’ That’s how we interpret this.
Sure a 100,000-room difference year-over-year in the active
pipeline is a lot, but 50% of that is in the final planning stage.”
STR projects that supply will increase by 2.2% in ’08, while
demand will grow by 1.4%, resulting in a 0.8% occupancy decline.
In 2007, attrition rates, or those projects that drop out of the
Lexington House in Manhattan (left) is a development of Hersha Development Corp. When it opens in the fall of 2009, the luxury extended-stay property will
have 116 units. Hersha also plans to open Hotel XV-L (above) in Philadelphia in 2010. The boutique luxury hotel will offer 143 rooms.