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Trouble Builds in Hotel Construction

Developers are adding to the global supply of hotel rooms at an astonishing pace even as per-room revenue and occupancy rates decline for most of the world.

Globally, hotel providers had more than 1.8 million guestrooms in the pipeline at the end of September, a 28% increase from a year earlier, according to the Global Construction Pipeline Report, published this month for the first time by Portsmouth, N.H.-based researcher Lodging Econometrics.

Of 10,781 projects around the globe, 41% are already under construction. By room count the percentage is even higher: Fully 836,567 rooms are already under construction, representing 46% of the pipeline.

“These are sure indicators that the forecast for new hotel openings is set to accelerate over the next two and a half years,” Lodging Econometrics researchers conclude in their report, which was released Nov. 6.

A little less than a third of the 785,547 guestrooms in the U.S. pipeline are under construction. In contrast, 64% of the 506,646 rooms in the Asia-Pacific pipeline are under construction. Europe and Latin America are in the construction stage with more than half, or 56%, of their hotel pipelines.

Indeed, construction spending has increased faster for hotels than for any other non-residential sector in the past two years, according to Ken Simonson, chief economist at the Associated General Contractors of America. Construction for hotels totaled $29 billion in 2007, up 58% from a year earlier. Through the end of the third quarter this year, lodging spending is up 35% year-over-year.

Whether there is sufficient demand for new hotels is a different matter. Lodging occupancy is softening around the globe, according to Smith Travel Research. In the United States, the overall occupancy rate was 60.6% in September, down 5.9% from a year ago. While U.S. revenue per available room (RevPAR) remains slightly positive on a year-to-date basis with 0.6% growth, that trend has turned negative in recent months; RevPAR declined 3.1% from Sept. 2007 to Sept. 2008.

Hotels are wrestling with an increasing imbalance of supply and demand, according to Duane Vinson, vice president for content management at the Smith Travel Research headquarters in Hendersonville, Tenn. The global economic slowdown first cut into spending by leisure travelers at the lower end of the price spectrum and is now hurting room sales in other hotel brackets, he says. Even upscale hotels have begun to feel the pinch, although September’s 3.4% year-over-year drop in occupancy for upscale properties was the smallest decline among hotel subsectors.

Now occupancy rates that initially fell due to softening demand are being driven down faster by new supply, Vinson says. RevPAR was down 8.6% in the Asia-Pacific region in September from a year earlier, due in part to a 12.4% drop in occupancy. European RevPAR was down 5.5% from a year ago for the same period, while occupancy was down 4.9%.

“Because we’ve been building so many rooms over the last couple of years, we’ve created somewhat of a buyer’s market [for guests] out there,” Vinson says.

Back in the United States, the supply of hotel rooms will increase by 2.5% in all of 2008 and then by another 2.4% in 2009, according to Smith Travel Research projections. Demand is expected to decline by 0.5% and by 1% in 2008 and 2009, respectively.

Lodging Econometrics is forecasting a similar pace of new rooms entering the market, with 153,373 units to be added in 2008 and slightly more — 165,245 rooms — to be delivered in 2009.

Yet both research firms say the market is already reacting to the credit crisis and global economic slowdown by putting some projects on hold. Simonson, the Associated General Contractors economist, expects the lodging industry to slash construction spending by as much as 30% in 2009. That puts hotels at the top a list of sectors that Simonson expects to experience weak construction activity in the year ahead.

An apparent bottleneck of hotels in the final stages of planning suggests that at least some developers are reluctant to move forward with construction. While it is difficult to differentiate between projects that are still in planning and those deliberately put on hold, Smith Travel Research identified 195,699 rooms as being in final planning at the end of September, up 86% from a year earlier.

“We’ve got this bubble of projects sitting there in final planning,” Vinson says. “The longer our economic woes draw out, we’ll be seeing more and more of these things move into abandonment and deferral.”

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