Hotel development is expected to reach historic peaks over the next several years, but which are the markets most worthy of developer attention? HOTEL MANAGEMENT spoke with Patrick 'J.P.' Ford, SVP and director of business development at Lodging Econometrics, to determine the top five markets developers should be concentrating on.
5. Washington D.C.
Our nation's capital has the benefit of being located on the East Coast, a prominent gateway into the U.S., but also benefits from infrastructure developments that make it appealing for hotelier investment. An average of 1 million riders per day are expected to travel on the city's metro line by 2030, prompting the addition of 220 new cars to the system and overall expansion, and with metro lines comes plans to add 87 new hotels to the region as of a pipeline report from Dec. 31, 2015.
"You open up a whole new section of metro and you get a lot of new commercial development," Ford said. "That’s one of the things driving that market area. The project is still behind, but hotels are banking on it."
4. Los Angeles
By virtue of being the largest gateway city on the West Coast, it only makes sense that Los Angeles would have a large development pipeline when industry figures are strong. And with occupancy continuing to push the limit of expectations, developers have 96 new projects planned for the city, all of them looking to benefit from the location's higher rate and demand structures.
"Los Angeles is more attractive to companies and tourism by virtue of it being a gateway city," Ford said. "It's considered sexier, higher in demand."
The energy sector is in an interesting place today, with oil prices falling and staying down over protracted periods. Despite this, Dallas, one of the biggest players in the energy corridor, continues to build hotels.
"You would have thought that investors would have pulled back in energy corridors, but they really haven't," Ford said. "Dallas added 50 projects to its pipeline in the fourth quarter of 2015. As for why, it's a bit of an enigma."
Currently, Dallas has 39 hotels under construction, 52 starting construction winthin 12 months and 30 in early planning stages.
In many cases, Houston and Dallas go hand in hand in terms of hotel investment and the reasons behind their development pipelines. While Dallas has 121 properties in its pipeline, Houston has 167, with 43 under construction, 87 to begin in the next 12 months and 37 in early planning. Like Dallas, from the outside looking in one may expect investors to be backing away from the area but instead they are diving in.
"The numbers don't indicate a cautious tone, they indicate otherwise," Ford said. "They go against what you would think would be happening there given the drop in energy prices. What else is keeping that pipeline alive and active is mysterious."
1. New York
For those of you who crave mystery, New York is not the place. Lodging Econometrics forecasts an 8.5-percent growth rate for rooms in the city for 2016, and an additional 4.8 percent rooms increase the following year. New York has 204 hotels in its pipeline, the result of increases in investment each quarter beginning in 2013. But what makes the market so strong, despite the cost of entry and sky-high competition?
The simple answer is that everyone wants a bite out of the Big Apple, but more realistically it's that the cost to enter the market requires such a commitment that few are willing to back out of a development even when the market sours. After finding a site, hiring architects, settling on a design and securing entitlements, developers are often knee deep in a project that they want to see to fruition.
"We all experienced a market correction earlier in the year, and I don't know what the New York numbers will look like come March 31 [the end of the first quarter], but if they go down it won't be by much," Ford said. "In the long term, developers know opening a hotel in New York will be good. They may take a cautious approach if things change, but they will continue to invest and get their hotel open.
THE OTHER SIDE OF THE COIN
Honorable mentions for development markets include Miami, Boston and San Francisco, all of which are smaller cities than the top five but nonetheless are experiencing a burst of new construction. However, Ford also mentioned two markets that were currently experiencing a building boom that may not be sustainable.
Austin, Texas, has a hotel pipeline 74 hotels deep, and Pittsburgh has 60 projects of its own on the way. For Austin, that means 8,740 rooms are opening mostly over a two-year period, increasing the city's supply by as much as 25 percent.
"This is a pretty significant increase for these cities," Ford said. "It's a high-tech area and a state capital with a state institution in the University of Texas and is known for its music. Whether that warrants this type of construction is unknown."
Ford clarified that a large number of these hotels are opening in Austin's suburbs, ensuring not all of the openings will take place in the city's downtown, but insisted that it is still a fair supply addition for a location such as this. Pittsburgh is in much the same situation as Austin, with Ford unsure of its ability to sustain the 60 hotels planned for it.
"If it's growing to match this type of development, it isn't making the news cycle," Ford said.