After reaching historically low levels earlier in the year, the pipeline for new hotel construction is showing the first tentative signs of expanding. If the momentum continues, analysts have predicted a wave of new building in the next few years that would see an increase in the number of hotels opening later in the decade across all price points.
An expanding pipeline would be welcome news for travel buyers, with more hotels in a market bringing greater competition. Existing hotels, consequently, would be more likely to negotiate favorable terms in an effort to retain buyers' business. New entrants, meanwhile, would be apt to promote special introductory rates as a way of encouraging trial usage.
Lodging Econometrics, a Portsmouth, N.H.-based firm that tracks new construction starts, estimated a "mid-decade development surge" that could last through 2008 or 2009. "The early signs in the pipeline are there," according to manager Peter Gluckler.
The firm cited the booming third-quarter jump in gross domestic product growth, plus a 40-year low in interest rates as underlying factors for the turnaround.
Gluckler also noted that guest room demand this fall has been substantially ahead of new supply growth nationwide, and that room rates have increased.
Lodging Econometrics' optimistic outlook was mirrored by the most recent performance statistics for the U.S. lodging industry as reported by Smith Travel Research. According to STR, revenue per available room grew 2.9 percent in October, compared with October 2002. Similarly, RevPAR for September jumped 2.6 percent year over year.
Given that it takes between 12 months and 36 months for new hotels to open—once construction has begun—analysts cautioned that 2004 or even 2005 would be too soon to see evidence of any turnaround.
PricewaterhouseCoopers, for example, expects to see 58,000 room completions next year, representing a 1.3 percent growth rate. By comparison, prior to the recession that began in 2001, lodging supply peaked in 1997 when 145,000 new rooms were completed. This represented a growth rate of 3.9 percent. Next year should be the trough, according to Bjorn Hanson, who heads PwC's hospitality practice.
The standards that banks use in approving loans for hotel development, which they tightened during the recession, have stabilized. Data "suggest the trend of tighter lending standards has come to an end," said Keith Mills, lodging industry analyst at UBS, although existing rules remain stringent. Mills does not see the supply growth situation changing significantly for several years.
Among the major multi-brand hotel companies, Hilton Hotels Corp. has the largest number of rooms in the development pipeline. At the end of the third quarter, approximately 385 hotels accounting for 52,000 rooms in the United States either were approved, in design or under construction.
According to Michael Rietbrock, lodging industry analyst for Smith Barney, Hilton has focused on growing its upscale Embassy Suites brand, though company sources cited expansion of the midprice Hampton and Hilton Garden Inn franchises as a key priority.
According to Rietbrock, Hilton displaced Marriott International as the pipeline leader. Marriott's development data do not distinguish new construction from conversions. At the end of the third quarter, Marriott said it had more than 47,000 rooms in development worldwide from all sources.
Among industry sectors, the upscale and midprice without food and beverage price points are undergoing the most development, Rietbrock noted in a recent report to investors: "They continue to experience disproportionate levels of new room supply growth."