U.S. hotel industry is approaching a construction boom

Cabana Bay Beach Resort at Universal Orlando Resort.

The hotel industry in the United States is back into a construction mode. According to Lodging Econometrics, the U.S. development pipeline included 4,038 hotels with 507,221 rooms at the end of the second quarter. That’s an increase of more than 20 percent in both properties and rooms over the second quarter of 2014.

Nearly 70 percent of rooms in the development pipeline are either under construction (146,743 rooms) or will start construction within the next 12 months (198,506).

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“There’s no question there’s more construction going on,” said Chris Nassetta, president and CEO of Hilton Worldwide Holdings, during a second-quarter earnings call with analysts. “Not just in hotels, but across the board there’s more infrastructure spending going on. You’re also seeing construction in other areas of real estate and home building is picking up.”

During the second quarter, Hilton approved 24,000 new rooms for development, and the company’s development pipeline included 1,510 hotels with more than 250,000 rooms. A little bit less than half the rooms in the Hilton pipeline are in the U.S.

Other major brand companies have been building their development pipelines. At the end of the second quarter, Marriott International had more than 250,000 under development, while InterContinental Hotels Group’s pipeline included nearly 1,300 hotels. Marriott boasts that it is the first company with more than 1 million hotel rooms open or under development.

Increasing numbers

In 2015, according to Lodging Econometrics, 754 hotels with 78,808 rooms will open, representing a 1.6 percent increase in existing supply. The number of new hotel openings will continue to build during the next three years, and during 2017, 992 properties with 113,968 rooms are expected to open.

Hotels in the upscale and upper-midscale segments dominate the current development pipeline. More than 2,500 hotels with nearly 285,000 rooms are under development in these two segments. That’s 63 percent of hotels and 56 percent of rooms under development.

The pipeline for luxury hotels is less robust and includes just 42 hotels with 11,785 rooms.

Where to build

Steve Rushmore Jr., president and CEO of HVS, said the increase in new hotel construction should create equilibrium between supply and demand in the U.S. by the end of 2016 or early 2017.

He also outlined the U.S. markets with what he calls “the highest entrepreneurial incentive for new construction.” Topping the list are Manhattan, followed by Austin, Texas; Brooklyn, New York; Denver; and New Orleans. Major markets lowest on the list of places to build, according to Rushmore, are Atlanta; Dallas; Ft. Worth, Texas; and Houston.

Costs on the rise

A rebounding U.S. and world economy, combined with a rise in residential construction activity in 2013, put pressure on costs of commercial construction, including hotels. However, according to the HVS U.S. Hotel Development Cost Survey, residential construction declined in 2014, which helped to ease construction cost increases.

In some top-tier markets, such as New York, San Francisco and Miami, hotel construction costs have risen considerably in the past three years. According to HVS, full-service and luxury hotel developers in Miami report cost increases of 25 percent to 30 percent in that time.

Cost increases are more manageable in most other areas of the country. In 2014, costs were up nationwide by about 3 percent. Cost increases for building materials varied from above 5 percent for lumber and cement to around 2 percent for steel.

Not surprisingly, the recent low point for hotel construction costs was during the last recession in 2010. Today, the average per-room cost of hotel development—including land; building; furniture, fixtures and equipment; soft costs and preopening costs—range from $86,900 for economy and budget properties to $335,000 for full-service hotels and more than $700,000 for luxury hotels.

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