Construction spending for hotels and motels jumped an estimated 17% last year and will expand more than 20% both this year and next.
Even so, this is a modest market expansion compared to the tripling of lodging construction spending from 1994 to 1999.
All of the market drivers are extremely strong. Room demand rose an estimated 4% last year; another 3–4% gain is expected in 2005. Credit the rapidly growing economy and the fading of the 9/11 travel phobia.
Room supply has not kept up with demand, rising only a little more than 1% last year, while hotel occupancy jumped 3.5% last year, pushing revenue per room up nearly 10%, according to Smith Travel Research.
This improved cash flow for hotel operators, which, combined with low interest rates, has sharply boosted the asset value of hotels. That makes the investment return on building a new hotel greater than the return from buying an existing hotel in many major markets.
The recent spurt in hotel sales will cause additional renovation spending for several years. Also, the emerging development trend of hotel/condo combinations is spurring construction activity. Adding condos to a project raises total project cost directly but allows for a quicker start-up: by using the condo purchase payments for construction financing, lenders have to assume less risk.