Hotel construction spending up 12%, starts up 37%

May 01, 2006 |

Hotel construction spending is expanding at a 12% annual pace after having dropped 1.6% last year. The rapid growth will double late in 2006 and remain at that high level through at least 2007. This expanded project spending is the result of a 37% increase in hotel starts—largely convention center and resort properties—from December through February compared to September through November, as reported by Reed Construction Data. Note that the hotel market's projected rate of expansion will be only half as fast as the market growth of 1995–96, which was more than 50%.

There is an upside risk that over-exuberant developers could repeat the frenzied building of the late 1990s by starting too many hotel projects, and there are enough new hotel projects on the planning calendar for this possibility to occur in the next 18–24 months. However, it is more likely that many projects will be postponed or cancelled unless economic growth also matches the overheated peak of the last business cycle of 2000–01.

Spending for hotel rooms is extremely sensitive to economic conditions, but right now fundamental market conditions are very favorable for hotel development. The strong economy will continue to support a 4–5% annual gain in domestic air travel and a 75% annual gain in international arrivals to the U.S.

The room occupancy rate has recovered to a very profitable 67%, up from 61% during the recession but short of the 69% in the late 1990s. Hotel operating profits will improve further in 2006–07, which raises the value of existing hotels and makes new construction more appealing than buying an existing property. Increased profits will result from room rates rising at a 4–5% pace, and a steady occupancy rate as room completions jump sharply from a barely positive 2005 (net of condo conversions and Katrina losses), according to Property & Portfolio Research.

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