The economic downturn and financial crisis impacted lodging more deeply than most, if not all, nonresidential construction segments. The volume of construction peaked in August 2008, when the annualized rate of lodging construction spending hit $38.21 billion. By the end of 2011, the volume of spending declined to $8.43 billion on an annualized basis, an astonishing decline of 78 percent.
Construction spending data indicate essentially no recovery in lodging construction volumes thus far. According to a recent STR/McGraw-Hill Construction Dodge Pipeline Report, 373 U.S. properties with 38,409 rooms opened last year, a 0.5 percent increase in existing room supply.
What’s remarkable is the pace of hotel real estate investment in the Americas reached a four-year high in 2011 as transaction volume surged to $15.2 billion, a 24 percent increase over 2010, according to a recent report from
Jones Lang LaSalle Hotels. Last year, U.S. volume reached approximately $14.5 billion, up from $11.3 billion.
This implies more interest exists in owning hotels than building them. Industry analysts suggest part of the reluctance to build is attributable to the dark cloud that continues to hang over the lodging industry. A potential wave of defaults and foreclosures threatens 2012 due to the massive number of loans that originated in 2006 and 2007 at the peak of the cycle, as well as today’s lack of sufficient replacement capital.
The threat of more distressed hotel properties hitting the for-sale market results in cautious lenders that lack sufficient faith in the future values of the structures they are being asked to finance today. Jones Lang LaSalle Hotels estimates $80 billion in collateralized mortgage-backed securities issued for hotels from 2004 through 2008 must still be addressed.
Accordingly, projects presently under construction remain at cyclical lows, with 408 projects and nearly 51,600 rooms underway as of the third quarter of 2011. The number of projects under construction has trended down to its lowest level since 2004. Scheduled starts during the next 12 months decreased to below 100,000 rooms for the first time, according to
Lodging Econometrics.
Although hotel openings will remain limited this year and in 2013, projects in early planning stages are on the rise. According to the Penn State Index of U.S. Hotel Values, overall hotel market values improved 12.3 percent last year to nearly $88,000 per room, and a similar gain is anticipated for 2012. The economy segment of hotels is expected to lead the way with a 15.5 percent increase in per-room value, up to $23,336. All other segments are projected to experience double-digit growth, including a $36,000 increase in the luxury segment to $325,252 per room, as reported by Lodging Hospitality.
Those rising values build a foundation for the lodging construction recovery to come. According to the
American Institute of Architects’ semiannual Consensus Construction Forecast, hotel construction spending is expected to rise 10.2 percent in 2012 and 19.7 percent in 2013. Of course, these large percentage increases come after years of massive decline, but the broader economic recovery, low interest rates and rising occupancy rates set the stage for what could turn out to be a sustained, multi-year rally in hotel construction.
Because developers and their would-be financiers are being cautious, the pipeline of potential U.S. hotel projects has not yet risen. According to data from STR/McGraw-Hill’s Construction Dodge Pipeline Report, the number of rooms in the total active U.S. hotel development pipeline declined 6.3 percent year over year in November 2011. At that time, the pipeline consisted of 2,861 projects associated with slightly fewer than 310,200 rooms.
As with any type of nonresidential construction category, some regions are faring better than others. According to STR, New York, Washington, D.C., Atlanta, Houston and Orlando, Fla., are among the strongest markets in terms of supply growth. New York boasts the largest supply growth by far, with roughly 6,500 new rooms opening in New York City between the beginning of 2010 and mid-year 2011.
Constrained financing and confidence imply the lodging recovery may not be particularly brisk, but after years of decline, construction is poised to rebound. Last year was the first time since 2008 the U.S. hotel industry reported occupancy in excess of 60 percent and an average daily room rate higher than $100, according to Smith Travel Research. With the economic recovery accelerating, business and leisure travel should continue to bounce back along with the backlogs of commercial construction firms.