New Lodging Construction Hits Record Low In 2Q03

The pipeline for new hotel construction in the second quarter of the year was at an all-time low, according to research released last month by Portsmouth, N.H.-based hospitality tracking firm Lodging Econometrics.

As an indication of how severely development has contracted, the pipeline was 53 percent below the record high achieved in the third quarter of 1998, when the lodging industry was heading into the banner years of profitability and occupancy that marked 1999 and 2000.

The situation has continued to erode. For the second quarter of this year alone, the pipeline fell 5.2 percent from the first quarter.

While a distressed pipeline is good news for the lodging industry since it means less new competition coming online in this period of reduced profitability, it's a mixed blessing for travel buyers. Certainly, a financially healthy lodging industry is to buyers' ultimate advantage, but a steady stream of new hotels opening in markets where buyers bring significant room nights translates into increased negotiating leverage with both existing and new hotels. Existing hotels are concerned about retaining corporate accounts they already have, while new entries in the market are likely to offer especially attractive rates as a way of building trial usage.

According to Lodging Econometrics president Patrick Ford, two factors were responsible for the bleak second-quarter results: the intransigent economy and the prolonged slowdown in demand for hotel rooms by business travelers.

"Hotel developers told us throughout the quarter that they were reluctant to advance projects up the development pipeline or to make any new project announcements," Ford said. "Most developers, in fact, were delaying projects in the hope of opening at a later date into what, by then, would be a confirmed recovery."

In terms of the top 25 U.S. markets, where most business travel occurs, supply had been growing at a faster rate than in the industry as a whole. "However, that gap now has begun to close," Ford said.

While the number of new hotel rooms in these markets increased 2.3 percent in 2000, that increase is expected to fall to 1.8 percent in 2003 and 1.7 percent in 2004. This is close to the 1.5 percent increase in new rooms that is projected for 2004 for all U.S. markets, not just the top tier.

Ford singled out six top markets—Boston, Dallas, Detroit, Houston, Orlando and St. Louis—where supply growth is expected to outstrip demand. Accordingly, travel buyers should be in an especially strong position when negotiating rates in those cities.

For the major hotel companies, the contracted pipeline has meant fewer development opportunities for franchises and management contracts. Rather than cut back on their ambitious growth projections, however, such companies as Marriott International simply have shifted their focus.

"More than half of our new rooms in the second quarter were conversions of existing hotels," said J.W. Marriott Jr., chairman and CEO, in his most recent message to shareholders. "Consequently, our global rooms growth continues to be on track."