Hotel Pipeline Grows as Sector Slows

The hotel pipeline grew more than 20 percent year-over-year–and the sector is sensitive to shocks, which the upcoming supply wave could magnify, analysts said.

STR, Hendersonville, Tenn., said there are more than 554,000 hotel rooms in the planning, final planning and in-construction stages in the United States, up 21.2 percent from a year ago. There are 182,929 rooms currently under construction–a 29.4 percent increase year-over-year. 

Though the hospitality sector has seen robust performance since the recession, much of its health has been buoyed by limited supply additions, with new deliveries remaining below the long-term average through 2015, said RCLCO, Bethesda, Md. This wave of additional supply could hit the market over the next 18 to 24 months-“perhaps just as the sector is reaching the late stages of the real estate cycle,” RCLCO’s Headwinds for Hotels as Construction Ramps Up report said.

RCLCO noted that some hotel sub-sectors could suffer more than others. “Upper-midscale and upscale chain scales, often of the ‘select service’ variety (e.g., Courtyard by Marriott, Hilton Garden Inn), continue to account for a disproportionate share of the construction activity,” the report said. “Select service properties have been favored for their leaner operations and diverse market appeal, which enable them to perform across a range of markets and locations, but significant upcoming supply will test their endurance.” 

In addition, though higher service level hotels represent a lower share of overall inventory than mid-tier hotels, rising levels of new higher service level hotel construction may be especially troublesome for that sub-sector, given softening international and corporate transient travel alongside rising labor costs, RCLCO said.

STR Senior Vice President of Operations Bobby Bowers said the top 26 markets account for nearly half of all U.S. hotel construction activity. “Occupancy declines have been more consistent among the larger markets, and that is largely due to new supply that has entered those markets,” he said. “Projects in the pipeline are likely to further affect occupancy levels and place more pressure on hoteliers’ pricing power.”

Among those top 26 markets, New York reported the most rooms in the pipeline. Two additional markets, Houston and Dallas, each reported more than 15,000 rooms in planning or under construction, STR reported.