The US hotel pipeline appears to be reaching a crest after setting record construction levels through this year’s second quarter, according to the latest report by Lodging Econometrics. A financing shortfall appears to be the primary factor in stemming the tide of new room additions nationwide.
The total construction pipeline peaked at 5,883 projects with 785,547 guestrooms in mid-2008, including a record-high 242,229 now being built. Early planning totals are also at historic highs, and projects scheduled to start in the coming year are also at record levels.
“If there was no lending crisis or economic slowdown, developers would have kept on going,” Patrick Ford, president of Portsmouth, NH-based Lodging Econometrics, tells GlobeSt.com. He notes that the nation’s hotel industry achieved record profits and strong operating results last year, which unfortunately was the same time that the credit crisis began.
Because of the customary lag-time involved in starting hotel projects, usually two to three quarters, the crest of the hotel development wave wasn’t visible until the midpoint of 2008, according to Ford. He attributes the anticipated hotel development slowdown to a domino-like sequence that started with housing troubles, followed by tightened lending, then by the national economic slowdown.
“This is a big anomaly” for the nation’s hotel industry, he says, pointing out that the hotel sector has turned negative only twice before in the last 25 years, during the 1980s recession and in the aftermath of Sept. 11, 2001. “These things cannot be foreseen by the development community.”
Hotel financing experts agree with Ford that lending restrictions will reduce the flow of development or even cancellation of projects, especially in cities where new rooms aren’t a pressing need. “Whatever is on the books to be developed, a lot of those deals are going to fall to the wayside,” says Scott Stephens, principal with Hospitality Real Estate Counselors in Tampa, FL.
But while hotel developers are dependent upon banks for financing, banks in turn need solid development projects to keep money turning within communities, Ford explains. Regional and community banks have been the key drivers behind smaller and more abundant hotel projects, with 100 to 200 rooms each, accounting for 44% of the total pipeline, he says.
However, balance-sheet troubles began to surface among those banks in the second quarter, further thinning the availability of financing, he says. Highly credentialed investor groups with exceptional hotel projects, that can invest larger equity in their projects, can still secure financing, but Ford contends that those developers won’t proceed unless they have a leverage position well under the dollar-for-dollar equity some lenders now demand.
Cutbacks in spending on corporate travel and off-site meetings are creating a leveling off in demand for new hotels that Ford believes would not have occurred otherwise. Other countries are now mirroring the American slowdown, being affected by a falloff in inbound tourism from overseas, he says.
How much of a slowdown will occur in years to come is difficult to predict. Ford suggests that franchise agreements for new hotels to start in the next 12 months will likely be extended as developers await resolution to the lending crisis, he says, adding that even a zero-growth pattern would still be seen as favorable.
Lodging Econometrics Q2 pipeline report forecasts a total of 1,218 hotels totaling 135,373 rooms opening in 2008, a gross growth rate of 2.9%, with 1,508 hotels with 165,425 rooms opening in 2009, representing 3.4% growth. The net change for new supply will likely be half a percentage point or less, the report stated. “We’re in one of the most unusual periods that we as adults have ever been in,” Ford says. “All the banks are closed.”