Real Estate Forum - May/June 2009

Y THE NUMBERS
Hotel Development
Continues Downward Spiral

Frozen credit markets and plummeting revenues have clamped

down on lodging development worldwide

As the credit markets remain frozen and hotel revenues continue to plummet, new hotel development has fallen steadily after the pipeline hit a cyclical peak in the second quarter of 2008. Since then, total global construction has declined 10% by projects ( 9,747 versus 10,781) and 12% by room count

( 1. 6 million versus 1. 8 million), according to statistics compiled at the end of

2008 by Lodging Econometrics.

Patrick Ford, president of Portsmouth, NH-based LE, says that a steep falloff in new construction began in September 2008 and has continued into the first quarter of this year. He says the drop is the result of the inability of all large commercial projects to get financed and the concurrent softening of lodging fundamentals.

“People are concerned about not being able to get financed,” Ford says,

“and the second concern now is the operating statistics that have surfaced in the lodging industry.”

In 2008, 2,811 new hotels with a total of 392,941 rooms opened their doors worldwide. Nearly 40% came on line in the US, which added 153,411 new rooms. Next up was the Asia Pacific region, which accounted for 38% of new global additions and reached a cyclical peak in 2008 with 907 hotels and 150,559 rooms. Spurred on by the Olympics Games, most of those were in China.

In most other regions, new deliveries are expected to reach cyclical highs over this year and next. Many of those projects were able to obtain funds earlier in the decade before the lending spigot was turned off. LE predicts that 2,758 hotels with 411,570 rooms will open in 2009, with 2,639 hotels and 435,133 rooms debuting next year. Excluding Asia Pacific and the US, which are poised to peak in 2009, new openings in the other regions— Canada, Latin America, EMEA—are expected to crest in 2010.

Contributing to the shrinkage of the global pipeline is a significant number of projects either being cancelled or postponed. Falling from a cyclical low in the final quarter of 2007, 738 projects with a total of 148,902 rooms had been shut down or delayed at the end of Q4 2008. The US led in that category with 51% of all cancelled rooms, followed by Asia Pacific at 26%.

Construction Pipeline: Percentage Change from the Peak

Q2 2008

Q4 2008

Region

United States

Canada

Latin America Caribbean, Mexico & Central America South America

EMEA
   Europe
   Middle East
   Africa

Projects

5,883

245

Rooms

785,547 32,499

Projects

5,358

237

Change Q2 to Q4

Rooms Projects Rooms

686,516 -9% -13% 29,408 -3% -9%

329

65,115

301

56,378

-9% -13%

341

56,316

315

51,055

-8% -9%

Total Pipeline

Source: Lodging Econometrics

1,022

556

179 2,226

10,781

172,249

164,259

36,855

506,646

1,819,486

971

503

171 1,891

9,747

161,236

147,488

35,267

437,374

1,604,772

-5% -6% -10% -10% -4% -4% -15% -14%

-10% -12%

Construction starts, meanwhile, have trended downward since a high point was reached in Q4 2007 and stood at 536 projects/73,527 rooms when 2008 ended.

Although new-project announcements rose 18% between the third and fourth quarters of last year, NPAs have been on a steady downward tilt since the end of 2007. According to LE’s Q4 ’08 report, NPAs hit 993 projects and 138,840 rooms at year’s end.

But there are some countries that have strong development pipelines, such as Canada, India and Brazil, Ford says. However, projects in Canada and India, similar to the rest of the world, tend to be smaller (under 200 rooms) branded projects in the select-service segments, where financing is more readily accessible.

Ford does not foresee a turnaround in new lodging development anytime soon. “The pipeline has peaked and we are going to go through a prolonged decline,” he says. “From the peak to the trough in the last cycle, it was a four-year period. We are going to show that our high came in 2008. The total pipeline will decline through 2011 and 2012 before we have a bottom. That being said, activity in the pipeline will continue, but it’s going to be focused primarily on mid-market projects.”—Maria Wood ◆