Hotel Construction Pipeline Reaches a Record Level

New Supply Forecast for '07 and '08 Is Modest and Will Help Boost Industry Wide Profitability

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. October 14, 2008

PORTSMOUTH, NH, January 22, 2007. Lodging Econometrics (LE), the Global Authority for Hotel Real Estate, in its year-end report to the lodging industry indicated that the Construction Pipeline reached a record level, surpassing the previous high set in 1999. At the end of 4Q06, the Pipeline contained 3,748 new Construction Projects being actively pursued by Developers, having 511,056 guestrooms

Patrick Ford, President of LE, said, "That's a year over year increase (YOY) of 23% for guestrooms. It's the third consecutive year of Pipeline growth and more than a doubling of the guestroom count since the cyclical bottom set in '03."

Ford indicated that the Pipeline will continue to grow throughout '07, albeit at a slower rate, and would likely set another record between 550 and 575,000 rooms by year-end.

Lending has shown some signs of tightening recently, but is still widely available at historically attractive interest rates and is not expected to fluctuate much in the new year. It should be another solid year for Developers, as New Project Announcements into the Pipeline continue to exceed the pace of New Openings and Cancellations exiting the Pipeline.

The Pipeline is Queued Up But Is Unfolding at a Slower Pace Than Expected

Earlier LE forecasted 80,951 new rooms to open in '06. In fact only 76,426 rooms opened, a 6% short fall. Quarterly interviews with Developers and Brand Managers to confirm construction start and completion dates indicate that continued delays are to be expected moving forward.

As a result LE has reset its near term forecasts for New Openings: 1,001 projects with 105,828 rooms for '07 and 1,092 projects/129,271 rooms for '08. These revised forecasts will produce net supply growth after removals from inventory below any threshold of serious concern. Ford said, "Supply growth over the next two years should be comfortably absorbed as the big influx years are likely to be 2009 and beyond.

At 4Q 162,921 rooms or 40% of the total Pipeline, were Under Construction. 220,991 rooms are Scheduled to Start Construction in the Next 12 Months, 37% of the Pipeline. Both are at higher percentage levels than what was recorded in the 90's."

New Openings in '07 will be characterized by a surge of Mid-Market w/o F&B hotels, rising to 439 New Openings having 35,980 rooms. These Hotels are from a variety of brands, average 75-125 rooms, and are generally at Highway and Suburban locations.

In '07 Upscale Openings will jump to 207 hotels/23,274 rooms, a 35% increase over '06. The '08 forecast calls for an additional 23% increase. The upscale segment is dominated by Marriott: with Courtyards, Residence Inns and Spring Hill Suites and by Hilton with Hilton Garden Inns and Homewood Suites.

'08 will see the first significant influx of larger CBD and Resort projects coming on line, mostly Luxury, Upper Upscale and Casino projects, many with a Residential or Condo Hotel component.

Competition for Market Share is Intense Amongst Major Franchisors

At the end of 4Q, Marriott's brands were on 13% of all Open and Operating hotel rooms. Hilton and InterContinental follow closely behind, both with a 12% market share. Each of these three companies have a portfolio of brands across a number of chain scales all of which have high consumer recognition and acceptance. The companies have comprehensive strategic plans and compete aggressively against one another.

Marriott specializes in the Luxury, Upscale and Select Service segments. InterContinental's heaviest concentration is in the Mid-Market, while Hilton is mostly focused on the Upscale segments down to the Mid-Market. Since Marriott does not have a smaller prototypical "Hometown" product like Hilton's Hampton Inn or Holiday Inn Express by InterContinental, the total project count in the Pipeline for each company often varies.

But, market share measurements based on total guestroom counts are surprisingly close. At 4Q Marriott has 80,740 guestrooms under development including, both Reflaggings and New Construction. InterContinental is next with 80,535 rooms followed by Hilton with 79,870 rooms. The room count variances are insignificant as all three companies have a 21% share, well above their share for Open and Operating hotels.

New Project Announcements in 4Q are also impressive as all three companies accelerate their quest for market share. Marriott announced 12,939 Reflagging and New Construction rooms for a 21% share. Hilton followed with 10,789 rooms for an 18% share and InterContinental with 9,065 rooms and a 15% share.

Competition to expand their portfolio of hotels is intense as each company strategizes to grow rapidly while lending is widely available and Development and Transaction activity is so heated.

The Construction Pipeline is Accelerating Rapidly in the Top 25 Markets.

Surprisingly, in '06 only 19,065 New Rooms Opened in the Top 25 Markets, slightly down from 19,710 in '05. With unusually high guestroom removals from inventory, net new supply growth was actually negative in nine markets.

According to Smith Travel Research, all 25 markets reported room rate increases in '06, seven of them at double-digit rates. That resulted in every market showing positive RevPAR improvement, 11 of which were at a double-digit pace. These revenue increases occurred in spite of 12 markets showing minor declines in Occupancy.

It's that RevPAR expansion that provides such great positive leverage for the industry's overall, record setting profitability results. The pace of improved industry wide results will moderate in '07 as the rate of ADR growth slows, removals from inventory decline and as New Openings rise in these 25 Top Markets to an aggregate 213 projects/25,568 guestrooms, a 33% increase of 6,503 rooms over '06. For '08, LE forecasts 270 projects/ 39,560 rooms, an additional increase of 13,992 New Room Openings.

At 4Q, ten markets had a Construction Pipeline greater than 10% of their existing census, a sure sign that their net supply growth rate will exceed 3% per year, '08 and beyond.

Lodging Econometrics (LE) of Portsmouth, NH is the global authority for hotel real estate. LE's Development Pipeline databases contain individual project records for Hotel, Condo Hotel and Timeshare development for the U.S. and Canada and for other countries and regions throughout the world: Asia, including the hot spots of China and India; the Middle East, including Dubai and Qatar; all of Europe; and for Mexico and all other Central American and Caribbean countries.