Project Growth to Continue, Supply to Outpace Demand

PHOENIX—The industry itself is in good shape overall. Simply put, project growth and room growth will continue to fill the pipeline into the new year.

The pipeline in Q3 2017 grew by another 10,400 rooms, putting the total at 608,837 rooms, according to the data provided by Lodging Econometrics, a real estate intelligence firm, at The Lodging Conference, held last week at the Arizona Biltmore, a Waldorf Astoria Resort. “Prior to 2017, the last time that there were 5,000-plus projects and 600,000-plus rooms in the pipeline was Q4 2008, so we have come a long way,” explained JP Ford, SVP at the firm.

The two dominant chain scales continue to be upscale and upper midscale.

The two dominant chain scales continue to be upscale and upper-midscale.

The two dominant chain scales continue to be upscale and upper-midscale. “Those two chain scales account for 70% of all new-builds in the U.S. pipeline,” he said. “The brands in those chain scales are the clear favorites amongst developers.”

With regard to markets, the five markets with most projects in the pipeline are the following: New York; Houston; Dallas; Nashville, TN; and Los Angeles.

As for new hotel openings, the firm is projecting there will be 112,000 new hotel rooms, representing a 2.2% growth rate over the number of opened and operating rooms at the end of 2016.

“Based on developer sentiment, the inflow of new projects into the pipeline and the expected opening dates for current projects, we are forecasting 2.5% growth rate for 2018-2019,” he said. “To give you some perspective, with the opening of 135,000 guestrooms in 2019, we will still be below the new opening peak that was set in 2008 with 154,000 rooms.”

He continued: “These are exciting times for our industry, due in large part to a prolonged lodging development cycle.”

Ali Hoyt, senior director of consulting and analytics at STR

Ali Hoyt, senior director of consulting and analytics, STR

Following Ford, Ali Hoyt, senior director of consulting and analytics at STR, made several points: demand growth continues to outpace supply; there’s a lack of rate growth given peak occupancy level; and modest RevPAR growth is expected to continue.

“We are forecasting supply to start outpacing demand in 2018, causing a slight dip in occupancy, with rates continuing to hold at very much the same levels that the industry has seen in 2017,” she said.

Adam Lair, managing director and senior partner at HVS, brought up last year’s conference, pointing out how transaction volume at that time had declined dramatically, CMBS had dried up, and REITs and institutional capital had moved “largely to the sidelines.”

Points worth considering: underwriting continues to be conservative and foreign capital has declined significantly this year, both of which are suppressing transactions in 2017. HVS expects hotel values to remain flat and stable through 2019.

From a hotel perspective, R. Mark Woodworth, senior managing director at CBRE Hotels, recognized that occupancy has clearly plateaued in the vast majority of markets; prices should go up modestly in just about all markets next year; RePAR in 2017 will be “just another okay year”; and expansion will continue in all markets.

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