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One of the sectors hardest hit by the downturn, lodgingundeniably has gotten its mojo back. Not all aspects of the sectorcame back at the same time, though; the development pipelineremained comparatively empty for several quarters while RevPAR andother operating metrics rebounded. However, in the summer of 2014,hotel construction is in full swing, with double-digityear-over-year increases in both projects and rooms in thepipeline.

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In a report at the start of 2014, Portsmouth, NH-based LodgingEconometrics observed that the volume bounce from the bottom seenin the second quarter of 2011 is significant “because it starts thesecond leg of the new real estate cycle where pipeline growth isexpected to steadily increase as single asset and portfolio sellingprices are now at record highs, signaling the point where it willbe cheaper to build new hotels than to buy existing ones.” Sureenough, 2014's numbers have represented bigger Y-O-Y increases than2013's did over 2012. Real Estate Forum's Paul Bubny spoke withJ.P. Ford, senior vice president and director of businessdevelopment at LE, to bring us up to date on the developmentscene.

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PAUL BUBNY: At the end of this year's first quarter,Lodging Econometrics reported that slightly more than 400,000 roomswere in the pipeline. Has that number increased appreciably as ofmidyear?

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JP FORD: At the close of the second quarter,there were 3,311 projects and 421,387 rooms in the pipeline. Sothat's a pretty decent bump from the end of the first quarter.

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BUBNY: What kind of year-over-year increase does thatrepresent?

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FORD: At the end of the second quarter of 2013,there were 2,822 projects in the pipeline and 350,151 rooms. On aproject basis, that's up 17%, and on a room basis, that's up20%.

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BUBNY: Are we seeing a concentration of development inthe top 20 or 25 lodging markets?

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FORD: New York City has the most projects inthe pipeline at 177, with 30,622 rooms, followed by Houston at 115projects and 13,306 rooms and Washington, DC with 81 projects and13,298 rooms. Taking a look at New York, if all of those projectsand rooms opened—and I emphasize the word “if”—that would be over a28% increase in supply. In Houston, supply would increase 18% ifeverything got built, and in Washington the number would be 12%.Again, that's a big “if.”

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Not all of those projects will roll out at the same time;they'll be phased in over the next three years. New York isabsolutely a gateway destination into this country, as isWashington. Houston is somewhat less so; a lot of the constructionpipeline there is oil- and gas-related.

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But one of the interesting things we've seen is that a prettyheavy portion of the construction pipeline is concentrated on thecoasts. With the exception of Chicago and Houston, it's the gatewaycities on the East and West coasts that have the strongestpipelines. They're also some of the highest-rated markets in thecountry, very attractive to developers.

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BUBNY: Since 2014, a number of global trouble spots haveflared up, such as Ukraine and Gaza. Do you see that having anypotential drag on either international tourism or investorinterest?

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FORD: The potential is there; I can't say thatwe've seen it. The hotel industry in this country is having a verygood year. If a lot of those international crises escalated a notchor two, and became prolonged, then it would represent more of aproblem than it is at the moment.

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BUBNY: One thing that's definitely in developers' favorat present is the low-interest-rate environment. In many differentcorners of commercial real estate, they're watching and waiting forthat to start to change. Do you see this posing any concern forhotel development, in terms of making construction financing moreexpensive?

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FORD: We all know that at some point, interestrates are going to rise. We've all been very happy with the ratethey're at right now and certainly wish for that to continue. Ifthere's a small bump in interest rates, I don't know that that'sgoing to put financing on the sidelines, or signal that financingwill go away. I think what's going to happen is that it will justbecome more costly for developers, and more costly for people whoare out acquiring hotels.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.