|
Portsmouth, N.H.
Lodging Econometrics (LE), the Global Authority for Hotel Real
Estate, announced in its 2008 Outlook for the Lodging Industry that the
Construction Pipeline stood at 5,438 projects and 718,387 guestrooms at
the end of 4Q 2007, breaking through the 700,000 guestroom barrier for
the first time.
It represents an
impressive 36% year over year (YoY) increase for both projects and
guestrooms. Further, in 4Q guestroom counts increased 10% quarter over
quarter (QoQ), the largest quarterly increase in almost three years,
said Patrick Ford, President.
According to Ford, The
development boom is led by projects in the upscale and mid-market
sectors, which together make up 83% of the non-casino projects and 76%
of the guestrooms in the Pipeline. These chain scales include the high
profile brands from the top franchise companies Marriott, Hilton,
InterContinental, and Choice, as well as Best Western. These companies
had an outstanding year selling their family of brands both to
developers for new construction and to investor groups interested in
reflagging their open and operating hotels.
In Q4, the number of New
Projects Announcements reached a cyclical high of 951 projects/116,590
rooms, a clear reflection of optimistic developers who anticipate the
lending markets will have stabilized and approached normalcy when they
are ready to seek financing.
New Hotel Openings
Are Increasing
In 2007, the expanding
Pipeline began to unfold in earnest, with 985 hotels/100,507 rooms
opening, a gross supply growth rate of 2.2%. This is the first year
since 2001 that more than 100,000 newly constructed rooms opened.
|
|
LE's revised forecast for New Openings in
2008 changed little at 1,208 hotels/133,628 rooms, a 2.8% gross supply
increase. The 2008 forecast is almost completely derived from hotels
already under construction. The net supply increase should finish around
2.5%, as LE expects a decline in operating hotels going offline for
alternative use.
The forecast for 2009 is 1,456 hotels/166,236 guestrooms, a 3.4% gross
growth rate. While these projections already account for anticipated
market conditions, 2009 could decline slightly if economic and lending
conditions worsen more than expected.
The Fed Acts to Coax Lenders from the Sidelines
As late as Q4, developers hoped that the residential real estate
mortgage and lending crisis would soon be resolved and not seriously
interfere with lending for hotels going forward, nor slide over and
affect the broader economy. That was not the case, as seen with the
abrupt economic and lodging declines in December and January.
Unfortunately, the mortgage crisis lingers on, with the full impact on
lender's balance sheets yet to be fully revealed. Investment and retail
bankers think it's in their best interest to program write downs over
several quarters in order to recapitalize at a more controlled pace.
More write-off's and profit shortfalls are expected through early fall.
To complicate matters, bad loans in other sectors - credit cards, auto
loans, etc. - are surfacing. As a consequence, instead of lending, banks
are conserving cash assets to cushion against future balance sheet shock
brought by additional write-downs, the possibility of trouble in other
debt instruments and their own profitability declines.
In an effort to temper the credit crisis, the Federal Reserve started a
series of innovative auctions in December to infuse banks with capital
at reduced rates. These emergency auctions are scheduled to continue
into the Spring and are meant to encourage banks to be more proactive
lenders.
In a surprise move on January 22, the Fed then reduced the Funds rate by
three quarters of a point, the largest decrease ever. This unusual
action, almost certain to be followed by further rate reductions, is
aimed at stimulating lending and preventing the economy from fading into
recession. The bottom line for the economy: Lenders simply have to
resume lending.
While hotel developers might have successfully waited out a difficult,
yet contained lending crisis, December and January statistics show that
the crisis is no longer contained. The broader economy is now being
seriously impacted by the reverberating credit crunch. In turn, the
lodging industry's operating results have been impaired, providing
developers with an additional concern.
Slowing Demand Could Pose a Challenge
Guestroom demand growth is the key metric to monitor. The consumer's
confidence is shaken. He's beset all around by mortgage foreclosures and
rising unemployment. His basic needs are rapidly inflating: food,
energy, gas, medical and education. He's losing equity in his home. He's
maxed out on credit cards, and now has declines in his stock portfolio.
He has few places left to source liquidity.
This is where the hotel industry could be vulnerable, with consumers
cutting back on vacations and getaways, and shopping aggressively for
the best rates in only the hotels they can comfortably afford. Resort
destinations, boutique hotels and hotels in CBD locations attracting
heavy weekend business will be the first to feel the pinch.
Facing potential declines in profitability, business investment may
slow. Layoffs are likely. Travel policies will tighten. Public companies
face an additional burden, with a falling stock market and the attendant
balance sheet disruption. Already down ±13% from October's highs, the
stock market is officially in correction. Bear market territory is
possible, a 20% drop from the highs, if the market continues to fall.
Declining Demand May Mean a Shortened Lodging Cycle
The Fed's rate reduction program coupled with the President's proposed
$150 B Stimulus package are clear indicators that the economy is
faltering and may be in danger of falling into a recession.
December and January operating results may indicate that a turning point
has been reached in the lodging industry too. Slower demand ahead would
mean less ability to increase room rates and grow RevPar. The reality of
a new operating landscape would likely call an end to this lodging
cycle. And, if there is a shortened cycle, it could come with a bang not
a whimper. Since the 2003 bottom, only 2004 and 2005 saw YoY demand grow
in excess of 3%, while after the 1992 bottom, demand growth exceeded 3%
in seven of the following eight years.
Critically important for the industry, a shortened cycle would mean
lodging's recovery from the '03 bottom would be over before the
Construction Pipeline could substantially unfold. Curtailed demand
growth would not be sufficient to offset new supply growth coming online
over the next three years, even though that growth would not be
excessive by historic standards. It would be like calling off the ball
game in the seventh inning because of rain.
Ramifications for Developers and the Construction Pipeline
From a developer's and real estate owner's perspective, a lot is riding
on the further Funds rate reductions and the stimulus package. The
strategies are designed to encourage more lending, stabilize GDP
declines and prevent the economy from falling into a recession. However,
the effects of the stimulus package may not be noticeable until late
summer, while the Fed's rate cuts could take at least nine months to
stimulate change.
As a result, there will be fewer New Project Announcements in 2008
across all chain scales. In particular, fewer Boutiques, unbranded
hotels and mixed use CBD and Resort projects will be announced into the
Pipeline, especially those with private residences. The Condo Hotel boom
is over, while the number of new Timeshare announcements is certain to
decline.
For projects already in the Pipeline, there could be an increase in
cancellations, as developers continue to have difficulty sourcing
financing. Projects not already Under Construction could be delayed, as
both financing and the underwriting process take longer to complete.
Properties under 200 rooms, with the top brands and the most experienced
developers - having conservative proformas that account for anticipated
supply increases in the years ahead - will be the most attractive to
finance during the current turmoil, either through local institutions or
a declining number of national lenders. There will be little opportunity
to finance larger hotels until the environment changes.
For an owner of an open and operating hotel who has a loan coming due in
the near term, it will be difficult to access new financing, even more
so if the property is over-leveraged and there is little equity in the
investment. Renovation and repositioning programs will also be
problematic, as lenders shy away from financing on forward projections
in a softening market.
All in all, for developers of new properties and owners of open and
operating hotels, 2008 is expected to be a challenging year. Most of the
issues for lodging developers, investors and operators are in front of
us:
The lingering banking and credit crisis
A declining economy, perhaps a recession
Softening guestroom demand, room rates, RevPar and operating profits
Fading real estate values
A lodging cycle cut short
If anything, it should be an interesting year. So much is yet to play
out.
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!
Answer any development or investment question you may have. Inquire
today about LE's extensive product line:
-Development Pipeline Reports for any market or country include a
Pipeline
Summary with a Three- Year Forecast for New Hotel Openings and all
Individual Project Records
-Contact Names for Owners and Management of Open and Operating Hotels
(Census)
-Sales Comps for all Recent Hotel Transactions
Email:
hotels@lodgingeconometrics.com
|
