Lodging boom continues, hotel starts up 94%

Lodging construction spending increased at a 95% annual pace through April, with construction spending forecast to rise 28% through 2006 and an additional 12% in 2007. Also in April, job site spending was 22.6% higher than a year earlier. Similarly, the value of lodging starts is up 93.5% year-to-date through May compared to 2005, according to Reed Construction Data. Major projects were recently started in Las Vegas, San Francisco, San Diego, Phoenix, Seattle, Philadelphia, and Atlanta. Most hotel projects now in the planning stage will be built.

The building boom is being driven by soaring hotel room sales, which have been expanding at a 9% annual rate for more than a year, triple the long-term growth rate, according to Smith Travel Research. Higher room rates account for two-thirds of the sales gains, which have boosted hotel net incomes and the value of hotel properties. As a result, it is now cheaper for prospective investors to build new hotels than to buy existing properties in many major markets. So far, few new hotel rooms have been completed; the supply of hotel rooms is up only 0.4% from a year ago, a figure that includes the loss of rooms to condo conversions and obsolescence. But by year's end, a surge of completions will bring supply growth up to the level of demand, which will steady occupancy rates near the current 68–69% and trim room rate growth sharply. Nonetheless, the demand for hotel rooms will keep expanding fast enough to keep the building boom alive well beyond 2007. The fact that a relatively large share of recent hotel starts have been luxury properties is a sign that room demand is being spurred by rising incomes.