Hotel Pipeline Keeps Filling

PORTSMOUTH, NH—Marking the recovery phase of the current cycle, the development pipeline is filling up in the hotel sector. Lodging Econometrics, headquartered here, notes a 13% year-over-year increase in the number of projects in the pipeline, and a 40% Y-O-Y rise in the number of projects actually under construction across the US.

Slightly more than 44% of the rooms being added to the total are being built in the 25 largest markets, according to LE. “There are now 18 markets with more than 20 projects in the pipeline,” the research firm says in its spring 2014 report on the sector.

No surprise that New York City leads the way, with what LE calls an “unprecedented” 180 projects totaling 30,304 keys in the pipeline, with more than half already under construction. “It has the largest pipeline in the world and has a pipeline-rooms-to-census ratio of 28.6%,” according to LE. That means that when all are built out, the city's current inventory of open hotels will increase by nearly one-third.

Although New York City's sheer scale puts it front and center in the development pipeline, the nation's capital is generating momentum of its own with 85 projects totaling 14,948 keys. “Washington too is growing at feverish pace, stimulated by a rapid expansion of businesses and consulting firms servicing various governmental agencies,” according to LE.

Houston has fewer keys but more projects in the works, with 100 in the energy0centric Texas city's pipeline. Los Angeles has 60 projects and 11,113 rooms in the pipeline, and it's followed by Chicago with 42 projects and 9,648 keys and Miami with 54 projects containing 8,998 rooms.

Given this emphasis on growth in large markets, analysts at MLV Research dispel the notion that supply nationally is growing at a too-rapid pace. “We believe urban submarkets, with their diverse demand drivers and higher occupancy levels, should be able to absorb this supply more easily than ancillary submarkets, resulting in the low level of supply growth through 2015 having an even lower impact on RevPAR growth than currently expected,” senior analyst Ryan Meliker and associate Michael B. Kodesch wrote in a report issued Thursday. “As RevPAR growth continues to exceed expectations, we believe the lodging stocks will continue to move higher.”

That being said, Meliker and Kodesch write, “we don't think low supply growth is fully understood by the market today. In our view, all new rooms do not have the same impact on national RevPAR growth. This is because we believe the make-up of the current construction pipeline is heavily skewed toward urban markets.”

In particular, supply dynamics appear to be most misunderstood regarding lodging REITs with portfolios that are more heavily skewed toward secondary markets, according to the MLV analysts. “Investor focus on chain-scale supply forecasts is misplaced, in our view,” and it “grossly overstates” the supply growth that Summit Hotel Properties, Hospitality Properties Trust and Ashford Hospitality Trust will experience, “making RevPAR expectations most muted for these companies. Based on current market multiples, we estimate this miscalculation by the Street is worth 14% to INN's stock price and 5% to HPT's and AHT's.”