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Hotel Developers to Keep Building Through 2016

Hotel Developers to Keep Building Through 2016

A combination of strong demand and measured new supply additions has resulted in very healthy fundamentals for the hotel industry, but experts say 2016 may mark the last year of expansion in this cycle.

Occupancy is expected to hit 65.6 percent by December, the highest annual level on record, according to a third quarter report from brokerage firm Marcus & Millichap. The average daily room rate has increased 5.2 percent to $120.99, and revenue per available room, or RevPAR, will reach almost $80 by the end of the year. Peter Nichols, national director in Marcus & Millichap’s national hospitality group, says owners and investors are still skittish from the recession and keep an eye out for a downturn event.

“Right now, I don’t see anything on the immediate horizon causing concern for the overall hospitality market,” Nichols says. “But there’s a sentiment out there that things have been good for a long time, with performance and profitability rising steadily since 2010. The typical cycle is 56 to 65 months, so everyone’s wondering if we’re at the peak now, especially with the threat of an interest rate hike in the next few months. There are no factors pointing to that currently, however, and with how amazingly low rates are now there are still legs to recognize significant gains.”

More hotel rooms coming on-line in 2016 will put some pressure on growth in the sector, but demand is high enough to handle the new supply, according to J.P. Ford, senior vice president at Lodging Econometrics, a lodging industry consulting firm. His hospitality data firm, based in Portsmouth, N.H., has reported that the pipeline for projects under construction has posted eight straight quarters of year-over-year growth and double-digit increases in each of the past four quarters. As of the start of the third quarter, there were 4,038 new hotel projects in the construction pipeline, a total of 507,221 rooms, up more than 20 percent from the third quarter of 2014.

The number of new projects will continue to accelerate, Ford says, and he doesn’t predict a peak in growth until at least 2017.

“We’re quite a ways from the cyclical high of 5,883 new projects in 2008, but I do see new supply growth rising from 1.6 percent of the total stock at the end of this year to 1.9 percent by 2017,” he notes. “I think we’re getting close to the end of the expansion phase, and will be moving into the maturity phase by the end of next year.”

Both say that select service hotels, especially in gateway coastal markets, are the most desirable properties for developers today, including brands such as Courtyard, Holiday Inn and Hampton Inn. These properties typically cost between $16 million and $18 million, and take about 24 to 34 months to build, a lot faster and cheaper than full-service properties.

“You have to be careful what you’re attempting to put up now, because if it’s going to take more than three years, no one really knows what the landscape is going to look like then,” Nichols says. “I would say if you have $50 million—which today, is not that difficult to get—then you should use at least some of it, though not all of it, for development.”

Ford agrees that while it’s relatively easy to get equity today, investors still need to exercise caution. Do your homework, he says.

“I definitely think the purse strings are open to build,” Ford says. “Main Street debt is available, Wall Street debt has become available, and if you haven’t jumped in the pool now, it’s a good time to get in… but you do have to be mindful of where you intend to build or buy. You need to be very in-tune with the market; scrutinize not only everything in that market, but everything around the corner from your interests. Even today, nobody can afford to be surprised.”

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