Large Hotel Pipeline Won’t Dampen the Party Just Yet

If you’re not already a player, you might be relegated to the sidelines of the current hotel boom. That’s according to HVS International President Stephen Rushmore in his industry update delivered this week at the New York University’s 29th annual international hotel investment conference attended by 2,300 senior hotel industry executives.

Starting in 2004, the hotel industry began a rip-roaring ride that has not yet subsided. Room values rose to $65,000 in 2004, up from $51,000 the previous year, a 28% increase. The increases have been dramatic each year since — up 26% in 2005, 22% in 2006, and they are projected to climb another 16% in 2007, according to Rushmore.

There is an end in sight to all of the froth but it won’t even begin until 2010. The drop, however, will only average 1% to 4% in most markets through 2013. “It’s certainly what you’d call a soft landing as opposed to the early 1990s and 2001 where values went down close to 24%,” he said.

Not surprisingly, the top three markets that gained the most value in 2006 included New York at $68,000 per room, Chicago at $52,000 per room and Seattle at $49,000 room. The bottom three of the 67 markets tracked by HVS, included Las Vegas, with a drop in value of $13,000 per room, Washington, D.C., with a drop of $17,000 and New Orleans, which plunged by $20,000 per room.

With the red-hot rise in values over the past few years, construction costs have been able to keep supply and demand in check. And while the pipeline is beginning to see some movement, it’s still not a concern, according to Mark V. Lomanno, president of Smith Travel Research, who shared the stage with Rushmore at the conference. Indeed, the construction pipeline has ramped up considerably over a 12-month period ending in April 2007. Specifically, 119,854 rooms were under construction in April 2006 versus 187,431 rooms in April 2007.

The new supply should not represent a problem because “that pipeline is elongated,” explained Lomanno. Instead of 12 months to build and open a new hotel in 2000, it is now taking on average a little over 19 months to bring new product to market. “We think that supply growth this year of 1.4% is actually lower because it’s taking longer to get projects built.”

Still, there are a few markets where the rooms under construction will present a threat to existing supply. The rooms currently under construction in San Antonio, for instance, represent 12.9% of the market’s total supply in the 12-month period ending in April 2007.

While overall supply growth has been modest year to date at 1.2% through May 2007, mid-scale without food and beverage stands out as an exception, according to Smith Travel Research. In that segment, supply rose 3.9% while demand lagged at 2.7% during the same period. Meanwhile, Luxury struck the best balance of all segments with 2.0% growth in supply and 1.8% growth in demand.

The luxury also experienced the highest occupancy of all segments with 71.2% in the 12 months that ended in May 2007. It was followed closely by other full-service product, including upper-upscale segment with 71.1% occupancy and upscale at 69.8%. At the opposite end of the spectrum, economy experienced the lowest occupancy with only 57.1%.

Overall occupancy, according to Lomanno, will be 63% this year and down just slightly in 2008 to 62%. This year also marks the first year that the typical hotel room will cost more than $100 nationally, he said. Average daily rates (ADR) also broke records 2006 posting a 7.2% increase. Smith Travel forecasts ADR to grow by 6% this year, and again, drop just slightly in 2008 to 5.2%. In dollars, that will translate to ADR of $103.47 projected for 2007 and $108.85 ADR next year. Revenue per available room (RevPAR) is projected to grow by only 5.3% this year, down from 7.7% in 2006.

So, where are we now? “Everybody should have been more concerned six months ago than they were about the performance of the industry,” noted Lomanno, “and less concerned than they are now.”

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