As hotel developers increasingly shift their focus outside the United States, U.S. hotel construction has reached its lowest level in more than a decade.
In fact, the actual number of hotel projects under construction in the United States at the end of the third quarter, 487 properties totaling 62,041 rooms, is the lowest that research firm Lodging Econometrics has ever recorded. Slightly more than 1,200 projects, accounting for fewer than 130,000 rooms, are slated to begin construction in the next year, the lowest level since 2004. As such, overall U.S. supply growth during the next two years will be at its lowest rate since the early 1990s.
There is simply better opportunity for revenue growth overseas, according to New York University Tisch Center divisional dean Bjorn Hanson. "This is a long-term, permanent refocus for many lodging companies," Hanson said. "The long-term outlook for revenue per available room growth in the United States is 3.1 percent or less. If you look at the rest of the world, the long-term rate of RevPAR growth is around 6 percent. If you look at India, China and parts of the Middle East, for the last decade, it's been in the double digits."
Credit markets play a role in such projects, Hanson added. Financing structures in several global regions provide government incentives and other forms of public funding for hotel development, while most U.S. development is private, with equity and debt harder to secure in tough times.
Of the largest U.S.-based hotel companies, Starwood Hotels & Resorts Worldwide has the pipeline most skewed outside of its headquarters country. As of the third quarter, markets outside of the United States, Europe, Japan and Canada account for 80 percent of the company's pipeline, and the Asia/Pacific region accounts for 62 percent of the company's future openings, president and CEO Frits van Paasschen said during Starwood's third-quarter earnings call.
"It's not far-fetched to say that China will one day eclipse the U.S. as Starwood's largest country, no more far-fetched than to imagine that both China's car market and China's number of Internet users would exceed the U.S., which they already do," van Paasschen said. "For some time now, we've acted not as a U.S. company with outposts in 100 countries but as a global company that happens to be based in the world city of New York."
Hilton Worldwide also reported a mostly international pipeline. Of the hotels under construction as of 30 September, more than two-thirds are outside of the United States.
At a glance, Marriott International's appears to be more U.S.-centric, with only 35 percent of the company's pipeline at the end of the third quarter focused outside of North America, according to CFO Carl Berquist. Of the company's full-service properties, however, 70 percent in the pipeline are in international markets, and of the 50,000 total rooms currently either under construction or awaiting conversion, about 60 percent are outside of North America.
Shrunken U.S. Pipeline Still World's Largest
Even though the number of rooms in the total U.S. pipeline is more than 50 percent lower than it was in the second quarter of 2008, the 386,656 rooms from 3,221 planned hotels still represent the largest pipeline in the world, according to Lodging Econometrics president Patrick Ford. "The United States pipeline is very strong in proportion to everywhere else, but in other growing economies, there are greater opportunities to do things that weren't there before," he said. "So, people shouldn't think that the United States is on the skids and other places are on the rise."
In fact, despite the shift in proportions, overall pipelines have declined all around the world since 2008, with the exception of India, Ford said. Large projects planned years before the economic downturn represent "the last fruits of the last real estate cycle," Ford said. As those properties are completed and exit the pipeline, it will take quite a while for similar projects to replace them.
The total construction proportions for U.S. hotel companies typically had been 70 percent domestic and 30 percent international in the past, Hanson said. Now, on average, it stands at about 50-50. As large projects overseas come online, that ratio might shift back to the 60-40 range in favor of U.S. development, but is unlikely to move past that, he said.
In the United States, midprice and select-service tiers dominate the pipeline. The midprice without food and beverage tier represents 1,417 hotels in the pipeline, and upscale hotels--which include such select-service properties as Hilton Garden Inn and Courtyard by Marriott--represent 724 hotels. All other tiers have significantly fewer properties in the pipeline, Ford said.
As such, hotel companies with more of a midprice and select-service slant have maintained higher development levels in the United States. Wyndham Worldwide, for example, still has more than half of its development pipeline within the United States. InterContinental Hotels Group, which in recent years has been investing heavily in its Holiday Inn and Holiday Inn Express brands, maintains more than 60 percent of its pipeline in the United States.
Hanson said that the midprice/select-service focus would continue to be the case even when the market fully recovers. "Even as construction returns in 2012, and starts a little bit in 2011, the types of hotels that will be under-represented will be the large, urban commercial hotels and big convention hotels," he said. "For buyers looking for upper upscale urban locations, availability will be a problem as occupancy recovers."