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Development Trends on the Upswing

While U.S. lodging projects may not match the explosion of developments underway in countries like Brazil, India, and China, pipeline metrics show that a period of moderate growth has been underway for a while in this country. In Q2 2012, 525 hotel projects were under construction, containing a total of 66,917 rooms. Room counts were up for the fourth consecutive quarter from the bottom of 387 projects and 49,028 rooms experienced in Q2 2011, signaling that the industry has entered the early stages of a new real estate cycle in the U.S.

Projects previously stalled in the pipeline, which were awaiting confirmation that the recovery could be sustained, have spurred construction starts. The annualized four-quarter trend for hotels scheduled to start construction is at its highest level in 10 quarters. But the most significant indicator for pipeline growth is new project announcements. At 1,180 projects and 147,447 rooms, the annualized four-quarter trend line has been on the rise for three consecutive quarters.

Based on current trends, these internal pipeline metrics support Lodging Econometrics’ initial forecast for new hotel openings in 2014 of 446 projects and 48,335 rooms. It’s a 31 percent room count increase and the first significant bounce back from the bottom set in 2011.

Brand conversions are showing strength too. The annualized four-quarter trend line at 444 projects and 53,091 rooms was up for the eighth consecutive quarter and is at a 13-quarter high.

Improved developer sentiment at the beginning of a new real estate cycle is predicated on a belief that an improving economy is not going to fall back into recession and that lodging demand has turned around sufficiently so as to not be in danger of a major reversal. These thresholds were reached in the last two years, and the nascent beginnings of a new real estate cycle have taken hold.

Of course, moderate growth at such a slow pace is bound to generate frustration and impatience for industry insiders. Improvement in the lodging industry has been slower than hoped for, but solid none-the-less. Lodging Econometrics expects that both average daily rate (ADR) and revenue per available room (RevPAR) will exceed the previous cycle highs in 2013; perhaps occupancy too, but if not, then certainly in 2014.

It’s Lodging Econometrics’ expectation that once the election season is over the administration will be able to build a bi-partisan political consensus to ensure that job growth policies are at the top of the nation’s agenda. They are the key to improving consumer confidence, which is necessary to trigger investment by the business community. That will then spur further lodging demand and propel hotel development forward at a faster pace, well into the middle of the decade.

Patrick “JP” Ford is a SVP of Lodging Econometrics, Portsmouth, N.H. For more information, please email info@lodgingeconometrics.com.

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