Despite growing pipeline, there’s little worry about hotel overbuilding

HardRockHartfordcrop

While the hotel construction pipeline in the United States continues to grow, there seems to be little danger of overbuilding—at least in the short term. The market remains in a state of equilibrium, a condition that will continue at least through 2016.

Both developers and hotel brand companies remain bullish on new development. At the recent North America Tourism & Hospitality Investment Conference, a survey of attendees showed nearly half of them opened a hotel in the past 12 months, with 30 percent opening two or more. Nearly one-fourth of those surveyed have $50 million in equity for new construction investments, and 20 percent have $200-plus-million to leverage for hospitality investments.

A lot of development interest lies in limited-service brands. During a call with stock analysts following the release of the company’s third-quarter earnings, Choice Hotels International President and CEO Stephen Joyce said he expects the volume of new construction franchise agreements to accelerate over the next several years.

“The success of our franchise sales resulted in a 29-percent increase in our new-construction development pipeline and an overall increase in the pipeline of 28 percent since Sept. 30, 2014,” he told analysts during the call.

Strong pipeline

According to Lodging Econometrics, at the end of the third quarter the U.S. hotel construction pipeline included 4,055 hotels with 503,935 rooms. The pipeline represents about 10 percent of current room supply in the U.S.

The pipeline grew by 539 hotels and nearly 60,000 rooms from the end of the third quarter of 2014 to the end of the 2015 third quarter.

The upper-midscale chain segment is the pipeline leader with 1,590 hotels and 154,891 rooms under development. The upscale tier is also receiving strong interest from developers, with 1,025 properties and 135,600 rooms in the pipeline.

In 2015, according to Lodging Econometrics data, 742 properties with 78,656 rooms will open, a growth rate of 1.6 percent. Openings will begin to accelerate during 2016 and continue to 2018 and beyond.

Next year, more than 90,000 new-construction rooms will open, followed by about 114,000 in 2017 and nearly 280,000 in 2018 and beyond.

While robust, the hotel development pipeline is still 29 percent below the 2008 high of 5,883 projects and 785,547 keys.

The story is a little different for the Canadian hotel market, where the supply-and-demand equation might portend overbuilding. Through October year-to-date, room supply in Canada was up 1 percent, while the increase in room demand was 0.6 percent, down from a high of a 4.5-percent increase in 2011.

Also in Canada, fewer room closures might have an effect on possible overbuilding. In 2005, 833 hotels with 64,500 rooms closed. Year-to-date through October in 2015, 95 hotels with 10,800 rooms had left the market.

Boom in mixed-use projects

In addition to limited-service hotels, the market is seeing an uptick in the number of mixed-use real estate projects with hotels as key elements.

Mixed-use projects with sports tie-ins are particularly popular. In early December, Centerplan Companies announced a $350-million development in downtown Hartford, Conn., that will include New England’s first Hard Rock Hotel.

In addition to the 170-room Hard Rock property, the development will include housing, retail, a brewery and a 9,000-seat minor league baseball park. The hotel is scheduled to open in the fall of 2018.

Also in December, the city of Arlington, Texas, agreed to partner with the Texas Rangers Major League baseball team on a $200-million development near Globe Life Park, the team’s stadium. The public-private partnership will include a 300-room, as-yet unbranded hotel, a convention center annex and 100,000 square feet of dining, retail and entertainment facilities.

Pictured: A planned $350-million redevelopment project in downtown Hartford, Conn., will include a 170-room Hard Rock Hotel, the first in New England.

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