Conventional wisdom in the hotel industry dictates that growth in new supply will remain stagnant for the next couple of years, allowing existing hotels to flourish through improved occupancies and, more importantly, increased rates. While that’s true (STR forecasts a slim 0.7% increase in the number of new rooms to open this year and a 0.5% rise in 2012), some hotel companies and entrepreneurial developers are laying the groundwork for what could be another significant hotel building boom in 2013 and beyond.

“In the past year and a half, I’ve been asking developers whether they would like to own a hotel that opens in the first quarter of 2013, and almost universally the answer is yes,” says Mark Woodworth, president of PKF Hospitality Research. “It shows a high level of confidence in the hotel market and that things will once again be good by that time. The confidence is increasing, and developers will build if someone gives them the money.”

According to figures from Lodging Econometrics, the total hotel construction pipeline was down 13% in the first quarter of the year (as compared to Q1 2010), but the number of projects in early planning was up 16%, or 200-plus hotels and 18,000 rooms more than the previous year.

“The early planning counts have been on the rise since the fourth quarter of 2009,” says J.P. Ford, senior vice president of the New Hampshire-based firm. “And while not all of those projects will come to fruition, mostly due to financing constraints, it’s significant to see the front end of the pipeline growing as it is.”

Both Woodworth and HVS founder and president Steve Rushmore have recently encountered anecdotal evidence that hotel development is drawing renewed interest. Rushmore says his firm is doing more feasibility studies today than it’s done in the past five years. Woodworth agrees.

“We’re seeing more requests for pure market studies,” he says. “People who have tied up a piece of land and are thinking about building want us to help them figure out what kind of hotel makes sense at that location. This level of inquiry has increased dramatically in the past six months.”

So far, most of the interest in new development has been in tried and true locations with proven brands. Ford of Lodging Econometrics says 78% of the pipeline consists of properties in suburban or highway locations. “Not many are in CBDs or airport locations, and the pipeline for the luxury or upper upscale segments remains rather thin primarily because financing hasn’t really come back to the table for those size projects.”

Ford says 59% of the pipeline is in the upscale (Courtyard, Hilton Garden Inn, Hyatt Place) or upper midscale (Fairfield, Hampton, Holiday Inn) segments. “If you add midscale to that equation, you’re up to about 75% of the pipeline,” he says.

Hyatt has been particularly bullish as it attempts to jumpstart its Hyatt Place and Hyatt Summerfield Suites brands. Last month, the company announced a joint venture with Noble Investment Group to invest up to $80 million to develop properties under the two flags. The first property to be developed in the partnership is a 149-room Hyatt Summerfield Suites in Atlanta’s Cobb Galleria area. It opens in 2013.

All About the Money
Like everything in business, growth in the hotel industry is mostly a function of available capital. During the recent economic recession, lodging development mostly dried up because lenders backed away from the sector, not because developer interest waned.

“New development is tied directly to the availability of money,” says Rushmore. “If money isn’t available, specifically debt money and construction financing, we’re not going to see much building.”

That financing spigot is subject to the vagaries of national and world economies, as well as lender perceptions of the lodging industry. Rushmore says HVS had been performing a lot of appraisals on existing hotels tied to CMBS financing, but that worked recently stopped abruptly.

“It was like a faucet had been turned off,” said Rushmore in a mid-July interview. “A big reason was the uncertainty in the money markets, as well as the situations in Greece, Spain and Ireland and the debate in the U.S. over raising the debt ceiling.”

Woodworth says many developers thinking about building hotels are weighing potential increases in cost of construction versus hikes in interest rates.

“When development ground to a standstill [a few years ago], the cost of materials, land and labor all dropped dramatically,” he says. “Prices are beginning to rise, not because of a meaningful uptick in domestic development, but because an increased global demand for commodities.

“If you’re in the development business, you need to balance whether the cost of construction is going up more quickly than the cost of borrowing. My sense is more lenders are returning to the market and if inflation becomes an issue hotels are the property type that represents a hedge for investors.”

The Pioneers
While most new development activity is slated for the middle of the market, several hotel companies are betting on the viability of big-box convention hotels. Both White Lodging and Gaylord Entertainment recently announced they’re proceeding with mammoth group houses in Austin, TX (White) and Aurora, CO (Gaylord).

White’s project, a 1,003-room, 26-story Marriott Marquis, is in downtown Austin two blocks from the city’s convention center. With 100,000 square feet of meeting, banquet and exhibition space, the property aims to compete for group business from national companies, as well as state and regional groups, says Deno Yiankes, White’s president and CEO of investments and development. Austin’s lively tourist trade should fill gaps between groups. Groundbreaking is scheduled for next summer with an early 2015 opening planned.

“Our ownership group has a long history of making hay while others are sitting on the sidelines,” says Yiankes, in explaining the rationale for the ambitious development. “The development and pre-opening sales and initial operating success we enjoyed in Indianapolis (a 1,005-room JW Marriott that opened in January in downtown Indy) played a significant role in giving the company confidence to pursue another project of this scale.”

Perhaps most impressively, White is financing the hotel through “internal sources” with some assistance from the city of Austin. White plans to continue developing in Austin and elsewhere. In the Austin market, where it already operates 21 properties, it’s getting ready to build a 296-suite Hyatt Place two blocks from the planned Marquis. Other projects in the works include a Hilton Garden Inn at the Salt Lake City airport and an unspecified 600-plus-room hotel in downtown Chicago.

The Gaylord property in Aurora, minutes from the Denver airport, is a continuation of the company’s expansion plans that in recent years included a new mega-hotel near Washington, DC. Like other Gaylords, the Colorado hotel will target large corporate and association groups looking to meet, eat, sleep and play under one roof.

“Our loyal customers have been telling us for some time they would love to replicate the Gaylord experience in a market in the western region of the U.S.,” said Gaylord Chairman and CEO Colin Reed in announcing the project in late June. Gaylord has also explored Phoenix as a possible hub hotel in the West. The company won’t say whether it is still interested in that project.

The $800-million Aurora Gaylord will have 1,500 guestrooms, 400,000 square feet of exhibition and meeting space and a western theme. Gaylord, as well as some unnamed joint venture partners, will fund the development with assistance from a tax incentive package from the city of Aurora. Like the JW Marriott in Austin, the property should open in 2015.

Hot Markets
The expected rebound in new hotel development won’t be felt in all markets initially or evenly. According to the STR/McGraw Hill Construction Dodge Pipeline Report, New York City leads all markets with more than 20,000 new rooms in the pipeline, including 5,853 under construction. Hotel development in the city continued through the downturn with several high-profile openings, such as the 316-room Dream Downtown, a $270-million renovation of an iconic building in the Meatpacking District. The outer boroughs are seeing action, too, with seven hotels under construction.

Despite the addition of thousands of rooms in recent years, Las Vegas is still a hot hotel development market, with nearly 10,000 rooms in the pipeline and 1,083 in active construction.

Nashville also has a hotel building boom with 1,400 rooms under construction and 2,100 more in some stage of planning. An 800-room downtown Omni accounts for a lot of the development, but other projects going up include a 344-room Drury Inn, a 119-room Home2 Suites by Hilton and a 102-room TownePlace Suites.