Construction Costs Constrict Pipeline

Preventatively high construction costs are clogging the ambitious development pipelines maintained by many major hotel chains, and if that continues, corporate travel buyers should expect little in the way of relief on surging hotel rates in the coming years, according to PKF Hospitality Research's 2007 Hospitality Investment Survey, released today.

A supplement to the survey notes that high construction cost has kept most planned and proposed hotel projects from breaking ground, and whether hoteliers are able to add supply in coming years is dependent on how those construction costs behave. "If construction costs continue to grow at rates exceeding inflation and property value increases, it is reasonable to assume that existing hotels will be virtual money-printing machines over the next few years," PKF senior advisor Jack Corgel said in the study. "On the other hand, should construction costs decline by 5 to 10 percent, the potential exists for the supply growth to exceed demand growth during the next two years."

Increased supply remains the best hope for buyers to see a slowdown of the rapid average daily rate growth they've experienced the past few years, the survey indicated.

"With no clear signs of a recession brewing and considering the unpredictability of catastrophic events, the most likely reason why hotel ADRs and asset prices will come down is supply expansion," according to Scott Smith, vice president of PKF's Atlanta office.