We're Still Building

Despite a troubled U.S. economy and the roiling of the financial markets, it's still a good time to build hotels. That's especially true if you're an experienced developer with a solid track record who's looking to build select-service properties. It's not so true if you're new to the business, have a spotty development history or if you're trying to build a complicated, full-service property in a high-barrier-to-entry market.

This situation is somewhat ironic as the hotel community typically finds ways to shoot itself in the foot during economic downturns. The biggest culprits are irresponsible overbuilding, usually fueled by ill-advised financing schemes and then backed by inexperienced or incompetent management that tends to discount room rates at the first sign of trouble.

It's all different this time. Development is proceeding at a hot, but measured pace, lenders are cautious but not spooked about hotel financing and, perhaps more importantly, owners realize the value of finding the best talent to manage their properties. And smart owners and GMs remember the silly and self-destructive discounting that exacerbated the turndown in business we saw following the recession that started at the turn of the decade and was further fueled by post-9/11 fears about travel.

The facts support the notion that hotel development is alive and well. LodgingEconometrics, which provides the most detailed industry data on development, says the hotel construction pipeline continues to expand, setting a record in the first quarter with 5,807 projects and 779,307 guestrooms under development. During the first quarter, 125,442 newly announced rooms entered the pipeline, an all-time high.

As several major public hotel companies reported in their recent quarterly results, development in select service continues at a strong, although slightly slowing pace. As Choice Chairman Chuck Ledsinger told a group of stock analysts recently, one-third of additions to the company in the first quarter were new-builds, down just a bit from 37 percent during last year's first quarter. At Marriott, the story is the same. CFO & EVP Arne Sorenson told analysts that the limited-service component of the company's pipeline is at about 79,000 rooms, up from 74,000 a quarter ago. “Many of our larger limited-service franchisees are well-positioned to reinvest in the sector,” he said. “They're able to secure financing through local banks with which they have relationships and are optimistic about the business.”

While full-service development is tougher (Sorenson admitted that some Marriott developers are experiencing delays in finalizing financing), Lodging-Econometrics says the segment is still active. According to the firm, during the first quarter 73 projects with more than 200 rooms each were announced. Thirteen of them were casinos, and while many are as yet unbranded, seven of the hotels already carry the Marriott flag.

The lesson is not to be afraid of the current economic environment. Cautious, yes. Methodical, yes. Panicked, no. Good times will return one day, and for a change, the hotel industry will be well-positioned to take advantage.

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