Hotel Construction Mounts
A Strong Comeback
After several years of restraint, hotel building is coming back.
With travel soaring as the economy recovered from recession and worries about terrorism and war, developers mostly shunned building hotels for other types of property even as the industry has accumulated record profits. Much of available capital has flowed to residential buildings, particularly condos. Rising construction costs have also kept a lid on hotel construction.
That appears to be coming to an end.
PricewaterhouseCoopers projects hotel-room starts will jump 45% to 120,000 in 2006 after a relatively anemic 82,100 last year. The 2006 number is higher than any since 2000 and well above the 20-year average of 96,000 starts a year.
Hotel construction will outpace all other commercial sectors this year, predicts Robert Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of McGraw-Hill Cos. of New York. With the housing boom showing signs of pulling back, hotels keep churning out profits as travelers fill up more rooms, allowing hotels to increase room rates.
The past three years have been the best for the hotel business in more than two decades. Revenue per available room jumped 8.4% last year, the biggest increase since 1984, according to Smith Travel Research of Hendersonville, Tenn. Bjorn Hanson, a partner in PricewaterhouseCoopers lodging practice, projects the key industry measure will increase 7.6% this year.
And more rooms are in the pipeline. Lodging Econometrics, a Portsmouth, N.H., lodging-analysis firm, says its measure of hotels under construction or in the planning stages is at its highest point since 2000. As of February, there were more than 428,000 rooms in the pipeline, compared with about 322,000 a year earlier.
Radd Way, a regional president for construction firm Weitz Co., of Des Moines, Iowa, says his office is building a Holiday Inn in Kansas City, Mo., and is in discussions on several other projects. "We're dealing with private investor groups getting into the hotel market that haven't done [hotel development] before," he says.
Much of the building will be in the suburbs, which have lower barriers to entry than urban centers, says Bruce Ford, a senior vice president with Lodging Econometrics. In suburban Washington, D.C., for example, 68 hotels are in the development pipeline.
To be sure, some question whether the industry is overly optimistic since part of the supply shortage has been caused by developers that have been converting hotel buildings into condos at a record pace. Last year, room numbers in nearly half of the top 25 hotel markets actually shrank.
Meanwhile, hotel profits are soaring, reaching a record this year and on pace to set another in 2007.
The Dow Jones U.S. Hotels Index is up 150% during the past three years. Bulls like Joseph R. Greff, an analyst with Bear Stearns, sees more room to run with demand still up strongly and supply still constrained since the first of the 2006 room starts won't come online until the end of next year. In a recent research report, Mr. Greff said the hotel stocks he covers, including Hilton Hotels Corp., Host Marriott Corp. and Starwood Hotel & Resorts Worldwide Inc., still have 15% to 20% of potential upside on average.
The favorable outlook also is attracting investors. Sales of existing hotel properties increased by 63% to $21 billion in 2005, up from a then-record $12.9 billion in 2004, according to Jones Lang LaSalle Inc., a Chicago-based commercial real-estate services firm that tallied hotel purchases of more than $10 million. And U.S. investment bubbled over to Europe, helping lift hotel sales there to a record €16.2 billion ($19.7 billion) in 2005, up 73% from €9.36 billion in 2004.
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