New Development Where to from here?

Questions, questions, questions. While there can be no question that the nation's hotel markets are still red-hot with capital, more and more observers are wondering just how many new hotels are really needed. In general, are the nation's hotel markets becoming overbuilt? Which segments are likely to go down first in the next economic turn? From where is all of the capital for hotel development coming?

We decided to do a bit of research on our own to find out. We wanted to determine the hotel development and renovation activities that took place in 1997 and that are planned for 1998. And too, we wanted to investigate how hotel executives view the current hotel development market and what changes they predict for the future.

So we designed a survey form of about 20 questions relating to present and planned levels of new development and renovation for budget, mid-priced and luxury properties nationwide. We then faxed it to 772 executive members of the American Hotel and Motel Association. We also sent a follow-up fax to the original sample who had not responded within one week.

By our cutoff date, a total of 107 executives responded to our survey, which is a 14% response rate. (Not too shabby in the world of surveys and such)

Who responded If we start with first things first, we wanted to know how many hotels and hotel rooms our respondents owned as of January 1, 1998. Perhaps not surprisingly, the majority of respondents (69.2%) said their company owns mid-priced, limited service hotels, while 52.3% own mid-priced full-service hotels. Over half (58.9%) own more than one type of hotel.

When it comes to where those hotels are located, over half (53.3%) have hotels in the Southeast, with 42.1% in the Midwest, 33.6% in the West, 30.8% in the Southwest, 29.9% in the Northeast and only 14% in the Northwest. As for international ownership, only 4.7% of our resondents own hotels internationally.

Another interesting tidbit here is the fact that of our respondents who own hotels, 61% are in suburban locations and 39% are owned in urban locales.

Renovations were made by more respondents than developments as 88.8% of respondents indicated money was spent on renovations versus the 65.4% whose organizations spent money on new developments. The estimated mean dollar value spent on new developments ($12.24 million) by those that developed was higher than the estimated mean dollar value spent on renovations ($6.17 million) by those that renovated.

Develop/renovate plans for '98 Since we conducted our research in the first quarter of 1998, it seemed only natural to ask our respondents for their look ahead at 1998 activity. We found that 78.5% of respondents plan to build or renovate hotels in 1998. Nearly half of respondents (46.7%) plan to build or renovate mid-priced limited service hotel rooms in 1998, while 29.9% plan to build or renovate mid-priced full service hotels.

Where is the hottest spot in the country for new development? According to our survey respondents, it's the Southeast (surprise, surprise), where 36.4% of them plan to develop new properties. This was followed by the Midwest, West, Northeast, Southwest and Northwest.

As far as renovation activity is concerned, again, respondents favored the Southeast, with little change in order of those markets following -- the Midwest, Northeast, West, Southwest and Northwest.

Planned spending for '98 With all of the talk about capital availability this year, it's no surprise that our respondents plan to spend money on both new development (84.2% do) as well as renovations (71% do). The greatest percentage of respondents (31.8%) said they will spend from $1 million to $10 million on new development, while only 17.8% said they will spend from $11 million to $20 million.

As for renovation, an equal percentage (38.3%) said they will spend less than $1 million and from $1 million to $10 million, indicating that owners are playing a wide range of options.

Statistically speaking, the mean dollar amount planned for development in 1998 is $16.6 million, while the mean amount planned for renovation in 1998 is $5.9 million.

Hot Development Regions When we asked respondents, "What do you consider to be the hottest region for hotel development?" surprisingly, what they considered to be the hottest region for development is not necessarily where they plan to develop.

Actullay the West is considered by the largest percentage of respondents (21.5%) to be the hottest region for hotel development, however the largest percentage of respondents plan to develop and renovate in the Southeast. While Boston was the most frequent first response to the question (What do you consider to be the top three local markets/cities for hotel development?), New York and San Francisco were the most frequently mentioned cities.

Financing Trends It is no secret how influential the public markets have been as drivers behind hotel mergers and acquisitions of late, but what about from the supply side? From where is the money for new development and renovation coming? The majority of our survey respondents said they use local banks to finance hotel developments, followed by major money center banks and Wall Street investment firms.

Interestingly, none of our survey respondents indicated that they used a pension fund to finance their hotel developments.

Customer profiles Given the state of the demand for hotel rooms in recent years by business travelers and tourists alike, respondents indicate that their customers are spending more per room night now than they did five years ago. The percentage of respondents that report business travel stays have increased (31.8%) is somewhat larger than those that indicate personal travel stays have increased (23.4%).

Ok, but what about the length of those customer stays? Shorter stays was a bigger trend with respondents' customers (23.4%) than longer stays (12.1%). Only 9.3% or respondents have not noticed a change in their customer profile over the past five years.

Future shock? It's crystal ball time, everybody's favorite subject, right? What does the immediate future hold for the nation's hotel markets? Based on our survey responses, it may not be so much a question of will certain hotel market segments become overbuilt, but when.

While 86.9% of respondents believe that the hotel industry is in danger of becoming overbuilt in the near future (a broad and sweeping generalization), the majority of respondents (62.6%) predict the current boom in hotel construction will last two to three more years. Whether that is a good or bad thing is still open to debate.

The most frequently mentioned hotel segment that is singled out as being in danger of becoming overbuilt (or identified as already overbuilt) is the mid-priced, limited service segment. This may be no surprise to anyone driving around major metropolitan areas lately where these properties are now outnumbering gas stations and retail stores, as developers attempt to tie up these prime locations while capital is still fairly plentiful.

Many of our respondents provided written comments to back up their views on the state of hotel overbuilding.

>From one respondent there was this, "Limited service is extremely overbuilt in the Southeast. Full service will be without curbs. Stop the insanity, again!" There was also this, "Availability of public money, both debt and equity, is pushing developers and public companies choosing growth." And this, "Far too much limited service being built. Multiple new properties where only one is probably needed. Over reliance on segmentation as the excuse to build too many rooms."

One respondent had this to say about the extended stay market, "Too many extended stays. I have been in this market for 15 years and it is not as deep as the new guys say."

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