Supply Growth in Check
By Robert Mandelbaum Director of Research Information Services, CBRE Hotels' Americas Research | February 18, 2009
What is foreseeable with a fairly high degree of certainty is the relative lack of new supply growth in the next few years. Given the lead-time needed to build hotels, projections of supply growth are somewhat predictable for a period of at least three years. Despite continued economic growth, rising demand, and growing room rates, the supply side of the performance equation appears to be in check from now through 2008. The Fall 2005 Hotel Outlook forecast shows a compound annual growth rate for supply of 1.9 percent from 2004 through 2008. For comparison purposes, climbing out of the industry recession of the early 1990s, lodging supply grew at a compound annual rate of 3.9 percent from 1994 through 1998. It is the relative lack of new lodging supply projected to come on line during the next years that has operators and owners of existing hotels most happy.
Why is hotel construction slow given the positive outlook for hotel demand and average daily room rates? One theory is that in most markets, it is still cheaper to purchase an operating hotel than build a new one. And, this is not because hotel values are depressed. We are currently in a unique situation when the industry is approaching a period of peak performance, yet the rise in development costs is outpacing the growth in hotel values. To gain a better understanding of current market conditions, we analyzed the factors that have driven historic development costs and values.
In addition to our firm's proprietary Trends in the Hotel Industry database, we rely on data from the following sources to examine the relationship between hotel values and development costs: Smith Travel Research (STR), Real Estate Research Corporation (RERC), Bureau of Labor Statistics (BLS), and the U.S. Department of Agriculture (USDA). Due to the availability of certain data, our analysis is limited to full-service hotels. To estimate historical changes in value, we utilized profit data from the Trends database and capitalization rates from RERC. A three-year weighted average of advanced profit data is used to simulate the "forward looking" nature of hotel buyers and sellers. Construction cost data from the BLS, combined with land value information from the USDA, measure annual changes in development costs. Changes in full-service lodging supply for major urban markets come from STR.
Profits and Value
The Hotel Business Review articles are free to read on a weekly basis, but you must purchase a subscription to access
our library archives. We have more than 5000 best practice articles on hotel management and operations, so our
knowledge bank is an excellent investment! Subscribe today and access the articles in our archives.