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More Developers Abandon Hotel Projects

In a fresh sign of weakness in the hotel sector, the number of guest rooms abandoned in the construction pipeline rose 75% in November, compared with the same period a year ago, according to Smith Travel Research. A hotel project is deemed abandoned when a developer or banker responsible for a project decides not to pursue it any further.

In November, 93,219 hotel rooms were abandoned in various stages of the pipeline, from early or final planning to construction. However, it is rare to abandon rooms once construction has begun, says Jan Freitag, a vice president with Hendersonville, Tenn.-based Smith Travel Research.

“Given the current state of the economy and the non-existence of new construction lending, these numbers aren’t surprising,” says Freitag. “We believe that we will continue to see this high level of abandonment through at least the first half of 2009. Until funding for new and existing projects is made available by lenders, there is little reason to believe that the rate of abandonment will slow.”

There are a variety of explanations for why so many rooms have been abandoned. Banks may want to renegotiate terms and may have requested a greater equity stake from developers, Freitag says. And with the economic outlook for 2009 still apparently dismal, U.S. hotel developers may have decided to hold off on new projects until fundamentals improve.

Even as some developers abandon projects, however, the number of rooms under construction is rising in some regions of the country. Indeed, three of nine U.S. regions had more rooms under construction in November than during the same period a year earlier.

For instance, the West South Central region, which includes Arkansas, Louisiana, Oklahoma and Texas, reported a 17.7% increase in rooms under construction. The Middle Atlantic region, which includes New Jersey, New York, and Pennsylvania, experienced a 12% hike. And the South Atlantic region saw a 3% spike in hotel rooms under construction.

The regional increases in rooms under construction are based on local market demand, Freitag explains. “All demand in the hotel industry is local. It is about some local developer saying ‘I don’t believe in the gloom and doom scenarios for the U.S.’” Regional developers may also believe that while the outlook for the U.S. hotel industry is bleak, their local market can support another hotel, he adds.

While demand for hotels is expected to drop off next year as a result of the ongoing U.S. recession, the total supply of U.S. hotel rooms rose 3.2% in November, compared with November 2007, reports Smith Travel Research.

The company expects the number of rooms under construction to decline going into 2009, considering the increased difficulty in securing financing and also because many brands are cautious about their debt levels for the new year.

Freitag expects that occupancy for the U.S. hotel industry will drop 3.9% in 2009, and that room rates will also decline, causing revenue per room to decrease about 5.9%. He also expects the recession to hit the hotel industry harder than the recession of 2001 did. Back then, weekend occupancy in the industry held up thanks to consumers, who continued to spend even as business travel dropped off, since they had access to “home equity ATMs.”

“Consumers were able to withdraw money because home prices kept rising. That unfortunately is no longer the case,” Freitag says. “So this is going to become a double whammy for the U.S. lodging industry with both the business and the leisure traveler curtailing their travel. So it is going to be a little bit harder this time around.”

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