Travel market revival boosts lodging spending

July 01, 2004 |

Construction spending for lodging has recovered to the highest level in two years after an aborted recovery early in 2003 was followed by nine months of slow decline.

Like office construction spending, the lodging market appears to be beginning a long period of sustained growth because most of the usual market drivers are very positive. The negative impact of fuel prices on travel costs is the exception, but is overcome by rising income, employment, and business travel.

Already, hotel occupancy rates have improved 3-4% and room rates almost as much. The largest improvements have been at luxury hotels in tourist destinations and at downtown and airport chain hotels, which means business travel is expanding. So far, the economy lodging market has not begun to recover.

Hotel asset values are rising along with the increased occupancy rates, making speculative building more attractive both to developers and to their lenders. Travel and hotel industry managers have seen enough market improvement to expect sustained growth in room occupancy and rates for several years.

A large number of new rooms are being planned to come on line during 2005-06, which means that construction has to start soon. The forecast foresees a 25-30% jump in lodging construction spending by the end of next year. That is just the beginning; more growth is expected in 2006 and beyond. Lodging construction spending quadrupled in the last lodging boom that lasted eight-and-a-half years.

Lodging construction spending

In billions of dollars

Quarter Year $
1 2004 10.4
2 2004 11.8
3 2004(f) 12.1
4 2004(f) 12.4
1 2005(f) 12.9
2 2005(f) 13.3
3 2005(f) 13.9
4 2005(f) 14.7
Source: U.S. Census Bureau
Forecast (f): Reed Research Group

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