Hotel boom ends but remains active

The hotel construction market expanded sharply last year and is expected to stay at its heightened level for several more years, but no further significant expansion is expected.

The hotel construction boom peaked early in 2007. Construction spending at hotel job sites began the year 66% above the same period last year, but was largely unchanged in the four months through January. Hotel construction spending is forecast to slip marginally through the end of next year, but remain more than 50% higher than the spending level of 2004-05. Spending will also remain above its previous peak level of 1998, even after allowing for nearly a decade of project cost increases.

The value of new hotel project starts, measured by Reed Construction Data, doubled over the last two years and appears to have peaked late in 2006, but is also likely to remain near peak levels for several more years. The hotel building boom was set off by more than 8% annual gains in revenue per available room late in 2005. These gains resulted from record low hotel construction levels for several years, the loss of hotel rooms to Hurricane Katrina, and the conversion of hotels to condos in a booming housing market. All these market drivers are now exhausted.

The completion of new hotels is now providing enough rooms to keep occupancy rates from rising further. As a result, room rate gains have slowed to a 3-4% annual pace. Commercial real estate developers are beginning to move on to higher expected returns in office, residential, and healthcare projects. The construction boom may persist well into 2007 for the luxury end of the hotel market, however, because it has better occupancy and room rate gains than the budget end of the market.