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May 2, 2023

Hotel Construction Growth ‘Leads Post-Pandemic Economic Recovery’

The year-over-year the hotel construction pipeline has grown in the Top 25 US markets, according to a new report by Lodging Econometrics.

Dallas leads the list with record-high project and room counts of 184 projects/21,810 rooms. Following is Atlanta with 144 projects/18,242 rooms, Los Angeles with 118 projects/19,066 rooms, Phoenix with 117 projects/16,100 rooms, and Nashville with 115 projects/15,354 rooms.

New York has the most projects under construction and Dallas has the most projects scheduled to start in the next 12 months. Nashville has the highest number of new projects announced in the pipeline.

Too Much Money Chasing Too Few Deals

Greg Perry, Senior Hospitality Asset Manager at RREAF Holdings, tells GlobeSt.com that he is encouraged by the robust pipeline of new hotels under construction in the United States.

“Institutional investors have been fighting with their wallets over high quality, new construction hotels for the past five years and there is still too much money chasing too few deals,” Perry said.

“Where we see a disconnect this quarter is the jump in the number of projects in the early planning stage. High-interest rates make financing new construction far less attractive today and even with the financing you feel comfortable with in hand, best of luck to any developer looking for skilled tradespeople to actually build the product.”

Shawn Gracey, Executive Vice President of Hospitality for Key International, tells GlobeSt.com that the construction pipelines of hotels and resorts across the country continue to grow, as the hospitality industry responds to the increasing demand for accommodation and experiences from both leisure and business travelers.

“With a focus on innovation and guest-centric design, new hospitality developments contribute largely to the continued growth of the national tourism industry,” Gracey said.

Hotels a Robust Inflation Hedge

Afshin Kateb, CFO and Head of Hospitality Investments at Palladius Capital Management tells GlobeSt.com that RevPAR has reached full recovery compared to 2019 and in some cases exceeded in the top 25 markets, signaling continued robust demand fundamentals.

“Hotel transaction activity has picked up despite macroeconomic and capital markets volatility as hotels have proven to be a robust inflation hedge,” Kateb said.

“While offices continue to struggle with vacancy in most markets, the ongoing bleisure phenomena (business travel + leisure travel) signals demand-side strength, giving confidence to investors that the sector has staying power.

As it relates to supply, although the construction pipeline may be robust, it is important to note that, according to JLL data, pre-COVID Construction-To-Opening (CTO) average timeline was 17.8 months, and post-COVID – due to rising construction costs, unavailability of labor and lending restrictions – the CTO has more than doubled. So, it may look as though many assets are under construction, it is likely that they will enter their respective markets in a more distributed and dispersed fashion.

Additionally, one should not assume that every hotel – even fully permitted ones – in the development pipeline will be delivered as the availability of debt and equity will control the development process. CBRE is estimating supply to increase at a 1.0% compound annual growth rate over the next five years and this rate is lower than the industry’s 1.7% long-term historical average.”

Leading the Post-Pandemic Economy

Philip Ballard, Chief Communications Officer & Head of Investor Relations, tells GlobeSt.com, “The strong and ongoing U.S. hotel construction pipeline is a very strong market indicator that the travel, tourism, and especially the hospitality industry, are leading our nation’s economic recovery since the pandemic.

Surveys across the board have consistently said this year that the #1 most-desired leisure activity Americans have is to travel, Ballard said.

“Construction of new hotels indicates the high confidence the industry has that the pent-up demand for travel will remain strong through the end of the decade,” he said.

“Keep in mind, the industry is really anticipating future demand since these hotels won’t be open for a few more years. It also makes sense that those cities are leading the hotel construction growth because they are all experiencing high travel demand this year and are hot job markets.”

For example, Phoenix just hosted the Super Bowl for the third time in 15 years, and the city is now realizing that they need a lot more hotels to meet the demand for inbound tourists, and not just on Super Bowl, but throughout the year, according to Ballard.

South Florida, Dallas Continue to Attract

Dev Motwani, Managing Partner and Principal at South Florida-based Merrimac Ventures, tells GlobeSt.com that South Florida’s hospitality sector is outperforming other markets because of its accessible location, the appeal of its oceanfront setting, and its picturesque weather.

“There was a belief that the market would subside in the wake of the pandemic, but today, Miami and South Florida boast one of the strongest tourism markets in the world,” Motwani said. “This strength is fueling the need for additional hotel inventory across all categories. The reality is that land is scarce, and particularly quality waterfront sites, so developers are getting creative in bringing new options to market.”

Kate Pittman, Vice President of Strategic Partnerships for Premier, tells GlobeSt.com, “In the Dallas-Fort Worth area, business travel has now returned to pre-pandemic norms, thanks to the market’s diversification in business sector offerings.”

Premier is currently developing Le Méridien Fort Worth, a redevelopment of the 13-story historic building formerly known as the Hotel Texas Annex. The 188-room hotel in downtown Fort Worth is scheduled to open in Q1 2024.

Delays in LA, NYC ‘Dries Up’

Mohamed Shehata, Senior Vice President, Cumming Group, tells GlobeSt.com that amidst the current volatility in the market, numerous projects are being put on hold before breaking ground due to the rising cost of capital, high-interest rates, skyrocketing insurance premiums, and rising construction costs with developers and investors waiting for the market to stabilize.

“Developers and lenders in Los Angeles are shying from both new construction and renovations, in part due to the recently imposed wealth tax and their wait for the outcome of the Los Angeles Responsible Hotel Ordinance’s ballot in 2024,” he said.

“The pipeline for the new hotels in New York City has dried up, in part due to the Citywide Hotel Special Permit, though we are seeing renovation activity. The state of Texas continues to experience steady growth, with an increasing number of luxury brands exploring opportunities for both urban and resort properties.”

Extended-Stay Brands Also Growing

Matt McElhare, Senior Director, Extended Stay Brands at Choice Hotels International, tells GlobeSt.com, “Everyone is looking to add exposure to the extended-stay segment given industry performance and profitability relative to traditional hotels.

“The demand picture is really strong which, combined with the difficulty adding supply in the near/medium term due to higher cost of capital and construction costs, is creating a favorable picture for high performance continuing in the extended stay segment.”

During Choice Hotels’ annual convention last week, Anna Scozzafava, Choice’s VP and general manager of extended-stay brands, said the company is on track to open its 700th extended-stay hotel within the next five years.

“Last year, one-third of all openings in the economy and midscale extended-stay assets were Choice projects. One in four ground breaks in those same segments [are] also our projects,” she said.

According to Ron Burgett, VP of extended-stay development at Choice Hotels, Choice has awarded 200 franchise agreements. At Choice, they have also expanded its extended-stay domestic pipeline to nearly 500 hotels, a 34% increase YoY.

 

This article originally appeared on Globe ST