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

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

The last time the lodging industry experienced a comparableperiod of strong demand growth and limited new construction was1994 to 1996, which was followed by robust levels of constructionactivity. During this period, total projects in the developmentpipeline averaged approximately 4,300 per year. By 2005,deteriorating industry fundamentals and increasing developmentcosts resulted in the decline in the total numbers of project toapproximately 3,000. Rapidly escalating market values caused thetotal number of projects in the development pipeline to grow by 81%from 2005 to 2006, according to data compiled by STR/Torto WheatonResearch and Dodge.