Hotel building boom slowing, but market still strong

August 11, 2010

Hotel construction spending in May was 37% higher than at the same point a year ago, but the 2007 dip in starts will soon push the growth pace lower.
       
Hotel construction starts fell by one-third in the second half of 2007 as financing became more difficult to secure and concerns heightened regarding near-term room demand. However, half the drop was recovered in the first half of 2008, with credit for the rebound going to better (although not normal) access to financing and lowered concerns regarding a recession. The rebound will keep jobsite hotel construction spending growing through next year, despite rising project costs.
Hotels remain the strongest of the commercial markets. Office and retail starts were unchanged in the first half of 2008, but the value of hotel starts rose 18%. Hotel construction spending in May was 37% higher than at the same point a year ago, but the 2007 dip in starts will soon push the growth pace below 10% through the end of 2009, which is a sharp slowdown from the 400% rise since January 2004. Similarly, hotel starts are expected to expand less than 20% over the next 18 months, which is the result of reduced profitability of operating hotels and the dip in hotel asset prices.

Revenue per room during the last year was up only 2%, down from a peak of 10% several years ago. The 2.5% net increase in hotel rooms in the last year cut occupancy rates by 2.5% as discretionary travel suffered through a subpar growth economy.

This news does not signal the end of the boom. It is still 30% smaller than the boom in the late 1990s, which led to a collapse in 2000. Additionally, market dynamics have fundamentally changed: think Las Vegas, which accounts for one-sixth of the U.S. hotel construction market.




         
         
 

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