Contrast that with the locally based firm's revised projections for new openings in 2009 and 2010. This year, 1,425 hotels/156,653 rooms will debut, a reduction of 5,036 rooms, or a 3% decrease, from LE's previous estimates. Next year, 1,073 projects and 124,439 keys will be delivered, which represents a decline of 21,277 rooms, a 15% drop.
J.P. Ford, senior vice president at Lodging Econometrics, says the steep reduction in the pipeline comes as no surprise in light of the slumping economy and the lack of an immediate impact from the government's efforts to spur lending. "It was inevitable that the forecast for 2011 would be down, and down pretty significantly," he says.
A developer mapping a 2011 opening must get their plans and financing in order now. However, they are "bumping into roadblocks, and as a result we are seeing a lot of projects either being cancelled or postponed," Ford says.
Yet Ford notes that smaller projects, typically between 75 and 150 rooms, in the mid-scale without food and beverage category can get financing at the community bank level. "Well-located, well-branded properties under $15 million, with the right entrepreneurs, can still get done," Ford states. "But anything above that is very difficult today."
Indeed, construction starts as of the second quarter stood at a cyclical low of 190 projects/19,820 rooms. At the same time, cancellations and postponements hit a record high of 507/76,726 rooms, marking the second consecutive quarter that cancellations reached above 500 projects.
Funding limitations coupled with new supply still coming on line have made developers skittish about starting new lodging projects. "A large number of rooms opened last year and are going to open this year," Ford maintains. "That combined with the general economic climate and the lack of lending certainly factors into a developer's decision of whether or not to go forward today."
That's reflected in new project announcements, which are at their lowest point in 18 quarters, plunging 68% from Q1 '08's cyclical high of 873 projects/125,400 rooms to a current level of 356 projects/40,682 keys.
The global pipeline is diminishing as well, Ford says. "However, the rest of the world is lagging the US by one to two quarters," Ford says. "You are certainly seeing cancellations and postponements around the world, but probably not at the pace that it is happening in the US at the moment. But we expect cancellations and postponements to continue to rise around the world as well."
In the long run, the emptying of the pipeline can only help current hotels as operating performance gradually improves. "But it may be a bumpy road short term," Ford admits. "It's all cyclical. We always come out of it and I'm certain we will this time."
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