Hotel openings forecast revised downward, project starts hit bottom

WORLDWIDE Lodging Econometrics has revised its forecast for new hotel openings downward for 2011 and 2012 as the ongoing banking crisis continues to curtail the availability of construction financing.

In 2011, a revised 562 new hotels with 57,482 guestrooms are now projected to open, while the forecast for 2012 has been lowered to 515 hotels and 52,213 guestrooms. This year’s hotel openings projection has been adjusted downward slightly to 698 hotels and 77,401 guestrooms, of which 519 hotels and 56,007 guestrooms have already opened.

The total number of projects presently under construction—487 projects comprising 62,041 guestrooms—is the lowest on record. The number of projects scheduled to start construction in the next 12 months—1,218 projects and 129,356 guestrooms—is at the lowest level since the end of 2004.

The lack of financing will have a profound effect on the number of new openings over the next three years, LE predicts. Projects that are already in the pipeline cannot migrate forward to start construction. The actual number of projects that start construction in a given quarter reached a cyclical low in the second quarter. The result of these bottoming metrics is that hotel openings coming online as new supply between 2011 and 2013 will be at levels lower than at any time since the early 1990s.

From an operations perspective, hotel owners and operators consider this excellent news. Improving RevPAR and occupancy figures in many global markets are better than expected and should continue trending upward, as there will be fewer new supply headwinds to overcome for the foreseeable future.

Improved metrics combined with gradual improvements in the economy and indications from lenders that financing terms may soon start to loosen are beginning to stir developer sentiment. An early sign is the 70 new project announcements of more than 150 keys that was recorded last quarter; half were previously in the pipeline but were cancelled or put on hold. The re-entry of these older, planned projects indicates some improvement in developer sentiment and could be the precursor of a new construction cycle starting sooner than expected. An early start to the next cycle could be hastened if more distressed hotels are resolved in private, rather than being formally put on the market for sale as foreclosed or otherwise distressed assets.

The overall construction pipeline is at 3,221 projects and 386,656 guestrooms as of the end of the third quarter, Lodging Econometrics says. Pipeline totals continue to decline and are now at their lowest level since the third quarter of 2005, however the rate of decline has recently moderated. The 487 hotels under construction, representing 62,041 guestrooms, is just 15% of total projects, the lowest since the 1990s.

Totals for early planning have remained somewhat constant, as these projects are generally larger, are in both urban centers and resort destinations and sometimes have mixed-use components. Projects of this magnitude have long development timelines from inception through completion, and in that sense bridge across development cycles. For the foreseeable future, the total construction pipeline is expected to continue trending downward, albeit at a slower pace.