Hotel sector is poised for boom

February 01, 2006 |

The delayed cyclical expansion of the hotel construction market is set to begin in 2006 and extend at least through 2007, after the initial expansion fizzled out in late 2004.

Hotel construction spending stalled at a $12 billion annual pace in 2005 after reaching $13 billion in late 2004.

The spending surge that began 18 months ago was spurred by investor reaction to an 8% jump in hotel operating revenue and a much larger rise in the asking prices of existing hotels. But this market expansion was quickly halted by the 10%-plus spike in construction materials costs early in 2004 and the accompanying rise in credit costs that made some scheduled lodging projects financially unacceptable.

Market conditions are again favorable for hotel starts. The value of hotel starts more than doubled in October and November compared to the rest of 2005. Hotel revenues are still expanding at an 8% annual pace (plus an additional 4–5% post-Katrina), but that will end in the early part of this year.

Long-term financing costs are up only 20 basis points from early 2004, with real interest rates (after inflation) about the same as in early 2004. Hotel construction spending is forecast to increase 11% in 2006 and 21% in 2007. Spending fell 2% in 2005 following a 12% gain in 2004.

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