HENDERSONVILLE, Tennessee—There were 349,317 rooms in the total active pipeline as of December 2013, according to STR, parent company of Hotel News Now. And while that number as a whole provides a snapshot of development activity in the United States hotel industry, it masks a number of interesting trends and data points that comprise it.
Jan Freitag, senior VP of global development for STR, dug deep into the data to highlight four trends in particular that hoteliers need to know.
1. Limited service in high demand
Limited-service brands, such as Holiday Inn Express and Hilton Garden Inn, comprise the lion’s share of development activity. The upscale and upper-midscale segments, in which the majority of those brands are found, account for 27.1% and 28.2%, respectively, of the total number of rooms in the active pipeline, according to STR.
“The limited-service properties are definitely the darling of the investor and especially the development industry,” Freitag said. “What we’re seeing is that those properties can be done fairly quickly, fairly easily and fairly (affordably).”
The segment has been somewhat insulated from the “financus interruptus” that plagued the lending landscape during the downturn. These projects are being built by local developers with long-standing ties with local banks, he said.
Guests, too, are clamoring for the product type, Freitag said.
“These wouldn’t be so successful—there wouldn’t be so much interest if there wasn’t so much demand. The demand numbers are fairly strong,” he said. “Obviously it’s all about location, but after that it’s clean room, free Wi-Fi and free breakfast. That’s exactly what these properties provide.”
The rise of limited service is cannibalizing development in the economy sector to a certain degree, Freitag said, pointing to the 1.2% share of rooms in the total active pipeline for which the economy segment accounts.
“If you’re spending $3 million or $4 million on an economy property, you might as well add a little more per room and end up with a nicer midscale property,” he said.
2. Construction is up across the board, but demand is local
Though rooms under construction are up a fairly significant 34.5%, that increase is all relative, Freitag said.
For one thing, the year-over-year increase is coming off a historically low base. There are 91,339 rooms under construction, which is well below the 200,000-plus rooms under construction during 2007 at the market’s peak.
For another, broad-scale pipeline metrics often have little to do with a given segment, market or street corner, Freitag explained.
“If you’re sitting in New York City, then yeah it’s going to be a lot of supply,” he said. However, the majority of markets are seeing little to no new supply entering the market.
3. NYC continues to lead all markets
When asked to describe New York’s development landscape, Freitag called it “hot, hot, hot.”
“New York City is very, very attractive. It’s running an occupancy that is in the stratosphere of occupancies and room-rates wise as well,” he said.
The market has 11,189 rooms under construction, which is nearly fourfold that of Washington, D.C.’s 2,819 rooms. Rounding out the top five markets with rooms under construction as of 31 December 2013 are: Los Angeles-Long Beach (2,523 rooms); Orlando, Florida (2,358 rooms); and Miami-Hialeah (1,975 rooms).
Can New York’s hotel industry absorb the 10.3% increase in existing supply should all those rooms come to market?
“New York is one of the odd markets where I would never bet against,” Freitag said. “‘If you build it they will come’ is an overused phrase, but in New York it may actually be true.”
4. Despite record demand, investors still skittish
The U.S. hotel industry sold more rooms during July than it has in its history, and still investors have been slow to get back in the development game.
“There’s so much money on the sidelines. There’s so much private equity and pension fund money coming into this market that we’re seeing this acceleration of deal flow. A lot of people want to get into the market,” Freitag said. “But they’re still very skittish to build hotels.”
STR projects a supply increase of 1.2% for 2014, which is below the long-run, 20-year average of 1.7%.
The hesitation often boils down to construction risk, Freitag said. A lot can happen in the two to three years required to build a hotel.
Still, “I’m still surprised we haven’t seen more construction,” he said.
The existing mantra among investors seems to be: “‘Show it to me when it’s done, and then I’ll buy it from you.’”