Hotel construction to remain steady in 2008

The completion of new hotel rooms caught up with demand in 2007, bringing an end to a five-year rise in occupancy rates of about 60-67%, slowing room rate increases from 6-8% to about 3-4%, and reducing prospective investment returns from buying or building a hotel, although hotel investments are still relatively attractive to real estate investors.

Hotel construction spending is estimated to have increased 66% in 2007, but the gain will be lower than 30% next year, and slow to 12% in 2009—still stronger than other commercial properties.

The slower growth in construction spending follows a slowdown in the value of construction starts, measured by Reed Construction Data. Year-to-date starts through October are up 28% from 2006, but monthly starts totals have been clearly lower since mortgage rate and credit availability problems spread from the residential to the commercial market last summer; the brief credit crunch last July cut hotel starts in half in July and August. The number of hotel rooms in the planning stage has tripled in the last few years, but slower demand means that financially marginal projects will not be built.

The 2006-07 surge in hotel construction was dominated by destination hotels—casinos and resorts—which are much more expensive per square foot than a traditional hotel facility. Nonetheless, there was strong growth in airport, downtown, and highway interchange hotels fueled by the rise in travel set off by the very strong economy in 2004-05. Hotel demand has also been sharply boosted by the 7-8% rise in foreign tourists (responding to the declining value of the U.S. dollar) and will be a significant source of added demand for at least another year.