In today’s high-cost environment, characterized by elevated interest rates and development expenses, the growth of new hotel supply and construction has been limited at a global level. As of year-end 2023, global hotel room supply increased by only 3.4 percent, which is 140 bps slower than the growth recorded in 2019.
Regionally, construction activity in EMEA has seen the most significant deceleration relative to 2019, dropping by 230 basis points, followed by the Americas at 160 basis points. This trend predominantly affects the Americas and Europe, while the impact is less pronounced in the Middle East and Greater China due to disparities in hotel construction and financing costs.
As a result, conversions have become crucial for brands to fuel their net unit growth (NUG), which accounts for 50 percent of their shareholder value. In fact, the number of conversions has surged to an all-time high of 21,000 hotel rooms in 2023. This growth has led to the emergence of conversion-only brands, such as Spark by Hilton, and conversions from other asset types, such as office spaces. Additionally, brands have pursued growth strategies via M&A and partnerships, as seen in Hilton's recent acquisition of Graduate Hotels and Marriott’s partnership with MGM, enabling them to expand into new geographic areas, hotel sectors and customer bases.
With the global hotel industry at an inflection point given that the construction pipeline is starting to accelerate, the opportunity for hotel brands and other asset types to pursue growth through conversions, partnerships and M&A will be most notable in the short-to-medium term and will likely be a driver of investment liquidity.
"The global hotel industry is at a unique inflection point in which the cost to build is generally significantly more expensive than the cost to buy, even if the latter requires a somewhat substantial capital expenditure to renovate," said Zach Demuth, global head of JLL’s Hotel & Hospitality Group. "Since global hotel brands (e.g., Marriott, Hilton, IHG, etc.) derive nearly 50 percent of shareholder value from net unit growth, many have turned to conversions as a way to meaningfully drive new supply, thereby increasingly their share of wallet. Look for conversions, possible M&A (e.g., Hilton’s acquisition of Graduate Hotels), and new brand partnerships (e.g., Marriott-MGM) to accelerate in the coming months as construction costs remain elevated."