|
Portsmouth, N.H. – Lodging Econometrics (LE), the Global Authority for
Hotel Real Estate, released its latest report to the Lodging Industry,
announcing the New Construction Pipeline in the United States set a
record at 5,011 projects / 654,503 rooms, making Q3 the fifth
consecutive record-setting quarter.
“Guestroom counts in the Pipeline are 31% higher than the last peak in
1999," said Patrick Ford, President of Lodging Econometrics. "However,
the project count is an astonishing 47% greater. Factoring in
cancellations and postponements – and New Hotel Openings of 228 Hotels /
23,187 rooms – the overall Pipeline accelerated by 375 projects / 43,162
rooms quarter-over-quarter (QoQ).”
Ford continued, “1,459 projects / 209,306 rooms presently Under
Construction and those Scheduled to Start Construction in the Next 12
Months – 2,390 projects / 286,948 rooms – are both at record levels. New
Project Announcements during the third quarter are at a record high of
817 projects / 102,305 rooms.”
“Surpassing 5,000 projects in the Pipeline is a milestone event," said
Ford. “It reflects the surge of select service and mid-market brands
developed earlier, as well as a number of new, contemporary brands
launched in recent years. Designed to meet the changing requirements of
today’s business and leisure travelers, these new brands are rapidly
gaining favor with developers,” Ford explained.
Ford further commented that the much-discussed credit crisis has not –
as yet – significantly affected those hotels already in the Pipeline or
impacted developers announcing new projects. Today, developers believe
that, while construction financing may be more expensive in the short
run, interest rates can be expected to stabilize at a modestly higher,
yet still attractive level after the markets re-price for risk and
resolve their problems.
A Decade of Strategic Repositioning: Set to Pay Off for Major Hotel
Companies
Years ago, the four largest hotel companies – Marriott, InterContinental,
Hilton and Starwood decided to convert from owning hotel real estate
assets to providing branding and managerial services to the development
and investment communities. This leaves the risks and rewards of real
estate ownership with investors who are better able to bridge the ups
and downs of economic cycles. For the hotel companies, the strategy
minimizes the cyclicality of earnings and emphasizes sustainable fee
income streams more in line with the quarter-to-quarter demands of a
publicly traded company, which should reward shareholders with a higher
valuation.
First emphasized by Marriott in the 1990’s – and now being aggressively
pursued by other companies – the new strategies resulted in the creation
of a family of branded lodging products at multiple price points across
numerous chain scales.
This has led to burgeoning Pipelines with
the potential for generating ever-expanding fee income streams.
Repositioning strategies can take years to accomplish. The process is
essentially complete at Marriott, and moving to completion at Hilton and
InterContinental. Also, to a lesser extent at Starwood, who will
selectively develop hotels— particularly in resort destinations with a
residential component.
A Variety of Brands at Different Price Points: Key to Company
Growth
Each company benefits from a flow of franchise fees, but those that have
iconic brands in the luxury and upper upscale sectors have another
potential revenue stream. They offer professional management services
and often can command management and performance-based incentive fees
that drive their earnings even higher.
Marriott, with 665 projects / 88,605 rooms in the Pipeline, has the
greatest potential for combined franchise and management fee income. Of
the 51 luxury and upper upscale projects not owned by Marriott, 24 have
chosen Marriott as their management team, a 47% success rate. Starwood
follows, with a 39% success rate.
Additionally, in the upscale sector, Marriott has 13 projects larger
than 200 rooms in the Pipeline and has been selected to manage nine of
them. No other company, as yet, has a management contract in that sector
for a property they don't own.
For calculating franchise fee income, Marriott with its strong family of
brands has the greatest market share, as measured by room count, in both
the upper upscale and upscale segments. In the luxury segment, project
counts for Marriott's Ritz-Carlton run second to Starwood’s total for
its three luxury brands.
InterContinental is indisputably number one in the mid-market segment—
with a whopping 830 projects / 77,818 rooms spread across their revived
Holiday Inn Brand, Candlewood Suites, and the popular Holiday Inn
Express— which has the largest counts of any brand in the Pipeline at
461 projects / 38,447 rooms. Hilton follows with the popular Hampton Inn
and Suites, with 372 projects / 34,194 rooms.
Hilton also holds a comfortable position in other segments. With Hilton
Garden Inns and Homewood Suites, it is second to Marriott in upscale and
third in upper upscale, with Hilton, Embassy Suites and Doubletree.
Newly Announced Brands: Gaining Traction
Companies with a family of brands designed and seeded in the last cycle
have now grown to critical mass, with hefty Pipeline totals that will
drive earnings. Developer reception to the new, contemporary brands
announced in the last few years has been positive. These new upscale
entries are attractive to developers, because cost-effective designs can
be placed in both CBD’s and Suburban locations, where there is
sufficient rate elasticity to cover escalating land acquisition and
construction costs.
It takes more than a decade to develop a new
brand to critical mass. The numbers are an impressive start for these
companies who recently strategized to fill out their product line.
These new brands have the design, technology, marketing and reservation
prowess of the major hotel companies behind them. They also have
experienced franchise sales teams and a roster of interested client
developers in place. Today, it is nearly impossible to create a new
brand without the resources that a major hotel company provides.
Developers can’t risk an unaffiliated brand and lenders generally won’t
approve it. Being affiliated with a family of brands is also essential
for developers who hope to successfully navigate the financing shoals
ahead.
Major Hotel Companies: Ready to Reap the Benefits of Repositioning
The next four years, perhaps longer, will be a period of significant fee
income growth for the major hotel companies. Each company has between
20-26% of their existing guestroom census count – currently scheduled as
New Hotel Openings – coming from the Pipeline.
Three things will push growth percentages even higher: first, most
projects labeled "independents" in the Pipeline will make branding
decisions; second, New Project Announcements into the Pipeline will
continue to be strong; and third, future reflaggings of existing hotels
are yet to be calculated into each company's forecast.
With New Hotel Openings scheduled to exceed 135,000 rooms in 2008 and
165,000 in 2009, years of intense development activity will now begin to
pay off with an accelerated flow of franchise fee income. For companies
like Marriott and Starwood, a flow of significant management and
incentive fee revenue will come to fruition as well.
The repositioning of these companies from owners of hotel real estate to
companies providing branding and management services will soon be
complete— unlocking increased value for their shareholders.
Credit Crunch: Causes Little Impact on Pipeline to Date
Generally, any tightening of credit conditions increases the number of
project cancellations and postponements for projects in the Pipeline.
For the third quarter, only minor increases above trend line were
noticed, but nothing of significance. It will take another quarter, or
two, before credit-related changes are felt in the Pipeline.
New Projects Announcements into the Pipeline are expected to remain
strong, as developers generally view the economy as healthy, but
slowing. Not surprisingly, franchise sales teams are reporting one of
their best years.
For existing Pipeline projects, if a developer already has a
construction loan commitment and if the lender chooses not to
renegotiate, construction will likely start. If a loan has not yet been
secured, the developer will encounter delays. Lenders who securitize
their mortgages will be on the sidelines until more clarity emerges in
the financial markets.
For developers with deep relationships with lenders, they may expect
anywhere from a half to a full percentage point increase in interest
rates. Cash investment requirements increasing to 25-35% will mean lower
loan-to-value and higher debt-coverage ratios. As a result, the
financial feasibility for current Pipeline projects will change.
Investment returns will need to be recalculated. In some cases,
developers may not be able to meet the now-higher-than-expected cash
investment hurdles— and new partners may need to be found in order to
proceed with the project. The net result will be project delays. The
period of easy credit is over.
LE anticipates an increased flow of cancellations and postponements in
the fourth quarter and during the first half of next year. Generally,
the impact will be greater for larger projects. Smaller projects that
can be financed in the local community will fare better.
When all is said and done, a more normal lending environment will
result. Financing will be more difficult to obtain. The experience and
credit worthiness of the developer, the quality of the project, the
branding, and the management selections will take on added importance
with lenders.
It’s a serious correction for the financial markets and for real estate
values. But – through Q3 – it hasn’t yet had a significant impact on the
economy or the U.S. lodging Pipeline.
Lodging Econometrics (LE) of Portsmouth, NH is the global authority for
hotel real estate. LE conducts Supply Side research for all markets,
developers, Companies and Brands worldwide including the U.S.; Canada;
Caribbean, Mexico and Central America; South America; Europe; Middle
East; Africa; and Asia.
|
