When it comes to hotel development, consultants usually warn lodging executives about storm clouds, whether it's sunny or not. But this year, most analysts and executives say hotel development is healthy and will continue to stay so for some time.

The hotel pipeline is strong and getting stronger; according to PricewaterhouseCoopers, total new construction across all sectors is up 45 percent over last year, reflecting the largest three-year growth in RevPAR since 1981. Most of the 119,000 hotel rooms that began coming out of the ground this year are in upscale and midscale without f&b, PWC says.

This suggests that by year's end, occupancy will have risen to 64.3 percent and a 6.4-percent ADR rise will have generated an “impressive RevPAR increase of 8.4 percent,” according to Bjorn Hanson, PWC's hospitality authority.

There are challenges, particularly in what Hyatt executives call “mature regions” like the United States, Western Europe and parts of Asia and Australia. But Hyatt also says there are remarkable opportunities in China and India — even though, as others point out, those emerging economies are competing with the U.S. for the very materials hotels need.

“Steel is a lot more expensive, building materials are more expensive and contractors are very busy, particularly where there's been hurricane damage,” says Stephen Rushmore, president and founder of HVS International. At present, it's still cheaper to buy than build, he says, but that will change around 2008.

New development will start in economy and midscale, then work its way up, he says. The Southeast and southern Midwest will be hotbeds of activity, but eventually, even areas with high barriers to entry, like urban centers in the Northeast, will be conducive to new construction. Any place where market value is 10 to 20 percent higher than total construction cost is ideal for new-builds, Rushmore says.

Eventually, there will be oversupply — but not for a while. “We're in good balance because we have no control over what it costs to build new hotels and we've come out of some pretty bad years, so it's going to take a while for hotel values to exceed development costs,” Rushmore says.

“When that occurs, we'll see new development. We'll see oversupply, because money will be available and people will develop hotels. That's what happens every cycle that I can remember, back to 1970.”

Rushmore says he would buy hotels in New Orleans, San Francisco, Boston, San Diego, Washington, DC, Santa Fe, NM and San Antonio, TX. He would sell them in Norfolk, VA; Houston and Tallahassee, FL and he'd think long and hard about developing them in Phoenix, Portland, OR, Indianapolis, IN and Sacramento, CA. He would build new in Oahu, Hawaii, where it's particularly expensive — and potentially very lucrative.


Rushmore's skepticism — some might call it realism — isn't the dominant view. Hotel executives verge on the bullish and some are downright exuberant.

“Things have never been better,” says Bill Fortier, senior vice president of franchise development, Hilton Hotels Corp. “We're seeing new development continuing at an ever-increasing pace in all of our brands.”

Hilton has 670 hotels in its U.S. pipeline alone, representing solid, non-refundable deals requiring $60,000 to $100,000 down, Fortier says. Southern California and Florida have been particularly hot, though the latter is cooling. “Even Montana and the Dakotas are coming back, with a lot of Hilton Garden Inns, Hamptons and Homewoods.”

Hilton, like most other brands, offers no incentives to developers.” If a developer's having trouble getting money, it's not the right developer,” Fortier says.

Costs continue to rise, but “RevPAR has been going up faster,” he says. “We are Fat City these days.”

That's also the case at Choice, according to David Pepper, Fortier's counterpart.

“In our first quarter, new construction contracts increased 41 percent year-over-year, from 34 in 2005 to 48 in 2006,” he says. “Additionally, we signed 10 contracts for our new Cambria Suites brand in the first quarter, compared to 13 contracts signed during all of 2005.”

In addition, he says, interest in new-construction MainStay Suites and Suburban Extended Stay Hotel properties is “booming,” partially because of a 12- to 15-point occupancy premium in extended-stay.

Cendant Hotel Group, meanwhile, does offer development incentives for new-build Super 8, Days Inn, Baymont, Ramada, Wingate Inn, Wyndham Garden and Wyndham hotels.

According to Gus Stamoutsos, senior vice president of franchise sales and new construction, development is steady and there has been increased interest in building Super 8s, Days Inns, Baymonts and Ramadas. He notes that land costs are easing in the Southeast, so he recommends building new, rather than acquiring and converting, there and in parts of the Midwest, Alabama, Arkansas, Mississippi, Texas and New Mexico.

“The return on investment is as good as it's ever been, and there's inexpensive yet fairly plentiful funding,” says Roger Bloss, president of The Vantage Hospitality Group. Last year, Vantage launched The Lexington Collection, a suite of products linking midscale and upscale, to go with Bloss's wildly successful Americas Best Value Inn. His brands are doing exceptionally well, he says, citing 20 Best Value Inns under construction. At the same time, he notes, those are smaller properties of 40 to 50 rooms. “It's a lot cheaper, and you're able to build those properties on an acre or an acre and a half,” he says. “Those parcels are still available at a respectable price.” And the majority of ABVIs are conversions or rehabs.

The recent growth of so-called lifestyle flags troubles Bloss. “These are costing $90,000 a key and up, which means they have to get ADR of $100 and up,” he says. “You look at the median income and it hasn't gone up that much. Now you're asking people to spend $150 a night on average for a lifestyle product.”


The U.S. hotel industry is midway through a cycle of pipeline growth, according to Patrick Ford, founder and president of Lodging Econometrics.

Midscale properties without f&b is the fastest-growing sector, with 1,328 projects in the pipeline, 396 of them “in the ground as we speak,” he says. The 1,328 represent 113,935 rooms; the 396 represent 33,952. The coasts are particularly active, as are Texas and the upper Midwest. The popular brands are Hampton Inn & Suites, Holiday Inn Express, Comfort Inn & Suites, Fairfield Inn, TownePlace Suites by Marriott, Wingate Inn by Cendant, and Country Inn & Suites by Carlson; the top three in this sector, in order, are Holiday Inn Express, Hampton Inn & Suites and Comfort Inn & Suites.

The same regional patterns apply to upscale, with 639 projects representing 76,502 rooms in the pipeline; under construction are 208 representing 25,155 rooms. The popular brands are Courtyard, Residence Inn, and SpringHill Suites by Marriott; Hilton Garden Inn and Homewood Suites by Hilton; and StayBridge Suites by InterContinental. The top three, in order, are Courtyard, Hilton Garden Inn and Residence Inn. Many of these brands are upsizing to 200 rooms and surfacing as vertical towers in urban areas.

Meanwhile, upper upscale and luxury projects without a residential component, including properties of more than 300 rooms, “still do not pencil out,” Ford says, though they might within two years. Residential, as in condo hotels, facilitates financing because of pre-construction owner investment.

For now, the key trend is select service in urban centers, he says, citing fresh Courtyard, Residence and Hilton Garden Inn product in New York City. In addition, a majority of the 684 independent hotel projects in the pipeline “will go to midscale without f&b or to upscale.”

The third major sector is casinos, with 75 projects in the pipeline, 36 of them under construction; 54 of the 75 are in Las Vegas.

At midpoint in this cycle, Ford says, most luxury and upper-upscale projects have residential components or are mixed-use facilities. There's little freestanding development outside of resort destinations.

At the other end of the scale, in the budget sector, Microtel is the undisputed leader with 108 projects in the pipeline. Cendant's Super 8 is a distant second, at 41; Days Inn weighs in with 30. Economy projects are going up in suburban areas and highway locations.

The top markets for pipeline are, in order, Washington, DC, with 69 projects representing 11,888 rooms; the five boroughs of New York, with 59 projects representing 7,693 rooms; Dallas, with 50 projects representing 5,753 rooms; Atlanta, with 49 projects representing 5,831 rooms; and Norfolk, VA with 45 projects representing 4,935 rooms.

“You throw up a new highway and a new interchange, you got a new community and a new series of hotels,” Ford says. “That's how Atlanta and Dallas grow, and to some extent, Houston grows the same way.”


Like other consultants and hotel executives, Ford cites the rising costs of materials like steel and sheetrock as challenges. He also notes that the cost of oil affects transportation and the costs of petroleum-based materials. “There's so much competition for the supply of material,” he says, “and there are frequent shortages in construction materials.”

Other key worries: the “spiraling cost of land,” and the shortage of land in prime development areas. A robust employment picture is making skilled labor expensive, too, and the immigration situation remains cloudy, he says. Because immigrants fill many entry-level positions in housekeeping and f&b, “if the flow of migrants is curtailed in any way, the whole lodging industry is bound to have significant problems,” Ford says.

Kirk Kinsell, senior vice president and chief development officer for InterContinental Hotels Group, agrees that the picture is bright, particularly in midscale. “Costs continue to rise; they never go down,” he says. But increased RevPAR minimizes the risk and the potential is great, particularly in markets with high barriers to entry. The “reurbanization and densification of downtown areas” makes development of midscale and upscale lodging appealing, particularly when “money is attracted to those sectors,” he says.

At the same time, it's taking longer to build, says Lodging Econometrics chief Ford.

“From the time people make a development decision to the time they begin construction, their budgets change constantly,” he says. “That means it takes longer to get a hotel project done today because the timelines are much longer from a development point of view because of a lot of what they call value engineering: You're redesigning your project on the fly in hopes of meeting your budget.”

Kinsell puts it another way, saying limited- and select-service projects used to take two years from groundbreaking to opening. Now they take two-and-a-half years, and full-service can take three to four years. “The cost of dealing with communities, the time involved and the commitment and brain damage” can be enervating, he says.


Hyatt executives Charles Ephraim and Tiffany Leadbetter sum up the development situation succinctly. “High land cost and historically high construction costs operate to enhance development risk in mature economies, such as the United States, Western Europe, and certain parts of Asia and Australia. In these markets, proven performance and existing barriers to new entry make the acquisition of existing hotels a more attractive option. In emerging economies, little or no product exists and new construction or wholesale renovation is the only viable development option.”

Ephraim is vice president of development for international properties; Leadbetter is assistant vice president of development for domestic properties.

Hyatt approaches new-builds on a case-by-case basis, they assert. “Because there has not been a trend of overbuilding in ‘good times,’ the feasibility of new hotels continues to look strong based upon stable or increased demand.”


  • Midscale without f&b
  • Readily available financing
  • New discipline in the market
  • A longer development timeline
  • k Oahu, Hawaii; the Sunbelt; both coasts
  • Emerging markets like China and India

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