ATLANTA-Above average growth of demand and little supply of new construction, are two factors that have led to prosperity in the hotel industry. However, that may be coming to an end, according to a new study released by locally based PKF Hospitality Research.

Since 2003, demand has increased by 10.2%, while the net change in supply has been almost flat. According to Smith Travel Research, the average cost of renting a hotel room in the top 50 US cities has increased by 23% during this time period. As a result, occupancy levels have begun to moderate, with demand levels in 12 of the top 24 US markets declining in 2006.

If rates of new construction remain low, then hotel operators will continue to reap the benefits of strong demand. However, evidence exists that the industry may experience a wave of new construction. PKR Hospitality Research president Mark Woodworth notes that a select group of upscale and luxury developers have been able to close the gap between market values and replacement costs by incorporating residential units into their hotels. “We have also seen limited service hotel development in secondary and tertiary market areas where cost pressures have been less severe,” Woodworth says.

The last time the lodging industry experienced a comparable period of strong demand growth and limited new construction was 1994 to 1996, which was followed by robust levels of construction activity. During this period, total projects in the development pipeline averaged approximately 4,300 per year. By 2005, deteriorating industry fundamentals and increasing development costs resulted in the decline in the total numbers of project to approximately 3,000. Rapidly escalating market values caused the total number of projects in the development pipeline to grow by 81% from 2005 to 2006, according to data compiled by STR/Torto Wheaton Research and Dodge.

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