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Hotel Development Pipeline Swells

Buoyed by strong occupancies and room rates, the hotel industry is poised to embark on its biggest construction binge since the go-go days of the late 1990s. Lodging executives believe that the bullish conditions will continue through 2008, barring any unforeseen economic shock. Lodging Econometrics forecasts that 1,087 hotels with almost 116,000 rooms will open in the U.S. in 2007, up nearly 40% from 2006.

Patrick Ford, president of Lodging Econometrics, says that there is a pipeline of 490,000 hotel rooms in some phase of planning in the U.S., the highest total since the late 1990s when the pipeline exceeded 500,000 rooms. “The pipeline continues to grow, and it's possible that sometime in 2007 it will go well past 500,000 rooms,” Ford says. “We had very little new construction in recent years, so this acceleration in supply was anticipated.”

Tracking the action

Where is the new construction going to be concentrated? It will be mostly in the Sunbelt, in cities such as San Antonio, San Diego, Phoenix and Dallas, experts say. Philadelphia and New York will be active, too. The mid-market segment, with no food and beverage service, will be the biggest-growing category of hotels in the coming year, experts agree. The mid-market flags include Hampton Inn, Comfort Inn and Fairfield Inn. This will be followed by the upscale select-service segment, which encompasses such names as Courtyard by Marriott and Hilton Garden Inn.

What's slowed development to this point is that everything from cement to copper has become more expensive, with many projects budgeted 20% higher than a year ago. Rising costs and the unavailability of land in urban markets has dictated the reliance on middle-market brands. “These hotels are pretty standard in the way they're built,” says Arthur Adler, managing director and CEO of Jones Lang LaSalle Hotels in Chicago. “Many of them are built on empty pieces of land along a highway. They're uncomplicated.”

William B. Fortier, senior vice president of franchise development at Hilton Hotels Corp. in Beverly Hills, Calif., expects the company to open more than 200 hotels and 28,000 rooms in 2006, it's biggest year since 1999 when it opened 30,000 new rooms in 216 properties. The company is concentrating on the Hampton Inn, Hilton Garden Inn and Homewood Suites brands, he says, and expects to open 100 Hampton Inns this year, just short of the record 110 it opened in 1999.

“A 100-room Hampton Inn typically costs about $70,000 to $75,000 per key to build, while a 250-room Hilton costs closer to $230,000 per key,” Fortier says. Just nine full-service Hilton Hotels were set to open this year, and most of those are conversions from other brands.

Soaring profits are propelling construction. Marriott International, based in Washington, D.C., enjoyed a 9.4% increase in revenue per available room (RevPar) in the third quarter and expects a gain of 8.5% in the fourth quarter. Those are impressive statistics in an industry that historically has been content with RevPar gains of 3% to 4% annually.

Marriott concedes RevPar will slow in 2007, but predicts that it will average 4% to 8% growth through 2009. That should drive earnings up by 15% to 25% a year, the company says, allowing it to support as many as 100,000 new rooms by the end of 2009. The company is planning to add 50 new Courtyards in Europe alone.

Demand exceeds supply

Hotel occupancies are strong nationwide, reaching 65.2% at the end of the third quarter, the high end of the historic scale, according to Smith Travel Research. New York City's occupancy has been running particularly high at 82.2%. The net gain in the national supply of rooms will be 0.5% this year, while demand grows 1%.

Warren Marr, a director in the hospitality consulting practice at PricewaterhouseCoopers, predicts that RevPar growth, which averaged 8.7% nationally in 2006, will slow to 5.9% in 2007. “Hotels can't raise occupancy rates much higher,” Marr says. That's a trigger for new construction, but he thinks the pace of building will be moderate.

Meanwhile, the hotel resale market remains robust. LaSalle Hotel Properties of Bethesda, Md., recently paid $87 million for the 235-room Hotel Solamar in San Diego. CFO Hans Weger says that LaSalle is in the hunt for more assets in Boston, Chicago and San Francisco. “Hotel valuations aren't rising as rapidly as they were in 2004 and 2005, but it's still a seller's market.”

Weger believes that RevPar gains in 2006 hit a peak and will slow over the next few years. “But we haven't peaked in this cycle in profits yet,” he adds. “Hotel companies will probably be enjoying rising profits for the next two or three years.”

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