Too many projects in top markets?

The new construction pipeline continues to grow, (pipeline growth)

All markets are not created equal. Especially when we’re discussing new hotel construction. While some markets are chockablock full of potential, there are some even scarier than a party for hoteliers that runs out of booze.

It’s starting to muddy the perfect picture of opportunity and may portend the beginning of the end for this operations cycle. Yes, I know that is pretty tough stuff to hear. But the beginning of the end is really that; just the first whispers. Even with potentially 18 months to two years left in the cycle.

Before the good times wrap up, it will be a bevy of opportunity for both hotel franchise sales teams and industry suppliers tasked with outfitting these new hotels.

Earlier this week at HOTEC Operations & Technology, held in Austin, TX, I had the opportunity to host two back to back sessions with new hotel construction guru Bruce Ford. As SVP Global Development with Lodging Econometrics, his company tracks every hotel project in the world. From early planning, through new openings and renovations, they track it all.

When talking to him during two distinct sessions, one geared toward buyers, the other suppliers; we gleaned some very valuable information.

With existing hotel valuations continuing to escalate, Ford explained it’s become cheaper to build than buy in many markets. That’s sure to swell the new hotel construction pipeline, which already has 545,135 rooms in various stages of development.  

My backbone argument warning to hoteliers looking to maximize profits through hotel real estate is the industry is likely at peak pricing now. Wait six months, it’s probable you won’t see as much of a return as selling today.

I keep hearing banks are super friendly with loans and a spate of new brands are pushing development dollars as developers speculatively build properties they hope to flip upon opening. It also doesn’t hurt that RevPAR is at record breaking levels, noted Ford. It’s a familiar formula that’s as predictable as Donald Trump calling someone a loser.  Except this time the industry will lose out one the demand-supply equation flips in the customer’s favor.

What’s most fascinating is how certain markets are seeing an inordinate amount. Those half million plus rooms aren’t scattered around in an equitable fashion. In fact, the top five markets for construction account for nearly 20% of the entire pipeline, and nearly half the construction total for the top 25 markets.

The top offender is New York, which Ford said has already seen a supply increase of 25% during this cycle, and has an additional 204 projects accounting for 34,788 rooms. There are currently 102 projects going vertical. Houston, a market already pummeled on the operations side as the oil and gas business has become undone by low pricing has 167 hotels with 19,724 rooms in various stages of development. Other top markets include Los Angeles (98 hotels, 17,322 rooms), Dallas (1121 hotels, 5,465 rooms) and Washington, DC (87 hotels, 14,765 rooms).  

There’s no way I am going to convince you to not develop a hotel, it’s what you do. But I want to caution that opportunity is becoming more elusive than finding a McRib year round. So double down on due diligence and good luck.

Let me know what you are thinking in regards to the new construction pipeline or if you have a question for Bruce Ford. Drop me a note at [email protected] or on Twitter and Instagram @TravelingGlenn.