PORTSMOUTH, NH-Hotel development in the US remains on a downward spiral. Third-quarter statistics from Lodging Econometrics calculate that the total pipeline—which includes projects under construction, starts planned in the next 12 months and those hotels in the early planning stages—stands at 3,890 properties and 483,664 rooms, the lowest amount in three years.
At the same time hotels previously under construction open and exit the pipeline, cancellations continue at an elevated pace and new project announcements dwindle. "The pipeline is emptying and at rapid rate," says Patrick Ford, president of locally based LE. "New openings coming out of the pipeline crested in 2008-09. So all the projects that are under construction are essentially going to empty out in the next 18 months. We have two years of declines in front of us, and in effect the pipeline will be emptied."
In the third quarter, a new factor has emerged that is impacting the availability of finance for smaller hotels, which previously were funded through local and community banks. "Today, those types of banks are failing at an increasing rate and are forecast to fail at an even faster rate this year and next," Ford finds. "That means that even fewer projects in the pipeline will migrate forward toward construction and it also means there will be even fewer new project announcements in the quarters ahead."
In the first nine months of this year, 1,032 hotels with a total of 111,642 guestrooms opened. An additional 355 projects with 41,804 keys are expected to come on line in the fourth quarter.
Taking into account the lack of financing even for smaller projects, LE reduced its forecast for new hotel openings in 2010 by 10%. It now projects 988 hotels/112,684 rooms will open next year, followed by 749 hotels and 75,286 rooms in 2011.Much the same trends are seen in Canada, although to a lesser extent. Our northern neighbor's pipeline stood at 178 projects and 22,592 rooms in Q3, the lowest quarterly total since the first quarter of 2005.
"The lending situation was never as bad in Canada as it is in the US," Ford says. "The pipeline does act similar to the US, but not to the same degree." That means, Ford asserts, that while financing is available in Canada, albeit at tighter standards, and developers have been influenced by operating metrics and the economy, the situation was "not anywhere near as deep or pronounced" as the US.
New-hotel openings peaked in 2008 in Canada and remain historically high. Through the third quarter, 49 new hotels opened with a total of 5,858 rooms. In Q4, 12 projects with 1,327 rooms are expected to be delivered. By 2010, however, new hotel openings will decline, with LE estimating that 43 hotels/5,593 rooms will come online. That continues into 2011, with 34 projects/4,018 rooms projected to enter the inventory.
As for when new lodging construction will again become feasible in the US, Ford says that not only does financing have to become available again and operating performance improve, but the backlog of distressed properties must be cleared away first.
"It will be cheaper to buy than to build," he says. "That will be next phase after operating performance stabilizes and begins to recover incrementally. We will have to exhaust the cheap assets sales before developers say, it's now economical to begin new construction again. That is going to put us somewhere in 2013 probably."