Hotel construction spending, which has been very erratic, is up 28% since the bottom of the hotel building cycle two year ago. Although hotel construction spending fell 10% in November, December, and January, expect a cumulative 66% increase by the end of 2006. That will bring the 2004–06 gain to 80% compared to 125% during 1995–97 at the same period in the previous building cycle.
The expected building boom is being fueled both by an unusually favorable real estate financial environment and by large increases in demand for hotel rooms. Last year, according to Smith Travel Research, hotel operators added only 1% more rooms while they raised the occupancy rate 4% and boosted room rates 4%. Hotel profits improved sharply, although only to the bottom of the normal range. Together with unusually cheap credit costs, this prompted investors to bid up the price of hotel properties enough that building a new hotel is now a better investment than buying an existing hotel in many markets.
Most real estate investors now believe that hotels offer higher returns than other types of commercial buildings. It is now much easier for hotel developers to get construction loans because REITS are flush with cash that they need to invest and developers have learned to add condos to hotel projects to use the condo down payments for some of their financing.