US pipeline growing; pandemic could moderate supply
US pipeline growing; pandemic could moderate supply
07 JULY 2020 8:31 AM

U.S. pipeline data through May shows year-over-year growth, particularly in the upper-midscale and midscale chain scales, but pandemic conditions may lead to more conversions, deferred and abandoned projects.

REPORT FROM THE U.S.—The U.S. pipeline of under-construction hotel rooms in May was up about 7% compared to May 2019, though slightly down from April numbers, which likely represented the highest peak since December 2007.

Still, current pandemic conditions mean slowdowns in openings and permanent hotel closures could still be on the horizon, according to data from STR presented as part of the Hotel Data Conference webinar series.

STR is the parent company of Hotel News Now.

What’s in the pipeline now
As of May, upper midscale and midscale hotel rooms made up the 62% majority of the under-construction pipeline, according to Bobby Bowers, SVP of Operations for STR.

Source: STR, © 2020 CoStar Realty Information, Inc.

Some highlights in the current pipeline:

  • 15,400 luxury hotel rooms currently are under construction, and “about a third of those are in just one market, Las Vegas, and the second-highest number of luxury hotel rooms under construction are in Nashville,” Bowers said.
  • 15,200 midscale hotel rooms are under construction, representing 7% of the pipeline, and Bowers said that segment “has made really big steps” in the last five years.
  • Suburban hotel rooms represent 46% of rooms under construction, an increase of five percentage points since 2010. Bowers cited growth in cities such as Franklin, Tennessee, and Alpharetta, Georgia—“places with access to larger cities like Nashville and Atlanta, but with lower cost of construction.”

While overall pipeline trends over the past decade follow similar patterns, Bowers acknowledged “we may see a bit of a hiccup because of the environment we’re in now.”

One notable difference between the under-construction pipeline today vs. the pipeline in 2007 is the growth of rooms branded under Marriott International or Hilton flags.

The data shows that in 2007, Marriott- and Hilton-branded rooms represented 34% of the pipeline and today they represent 62% of it.

Excluding pandemic-related closures, the New York market had 15,300 rooms in construction as of May, which represented nearly 12% of the market’s existing supply. Also high on the list, Nashville has 6,400 rooms under construction as of May, representing 13.2% of its existing supply.

Conversion opportunities
“At this point in the industry’s operating environment, conversions may become more of an avenue for development,” Bowers said.

Typically, he said about 40% of rooms converting to independent come from economy hotel chains, and on the flip side, the majority of rooms that convert out of independent status go into an economy chain.

Bowers pointed out that while the number of hotel rooms that convert from independent status into upper midscale and higher segments is proportionally smaller, “that may change as we move on in this economy that we’re in now.”

“There are options now for independents to be soft-affiliated, and there are a lot of things a brand can bring along,” he said. “There are some locations, like resort locations, where properties can survive better without the brand … but I tend to believe that when times get really tough, there may be more movement into brands.”

Duration and attrition
STR recorded 704 new hotel openings between June 2019 and May 2020 and 74% of those fell in the upper midscale or upscale segments.

STR data shows that over the last four months, March saw big spikes when it came to projects being deferred or abandoned. For example, 21 hotel projects moved from planning to deferred in March, and seven moved from planning to abandoned in March.

Source: STR, © 2020 CoStar Realty Information, Inc.

“We’ll see how that plays out as the year moves on … but the actual attrition rates in the U.S. have been fairly consistent” over the years, Bowers said.

Supply changes
Bowers showed STR and Tourism Economics’ latest supply forecast, which calls for 1.4% supply growth in 2020 and 1.3% in 2021.

“Before the virus, we were expecting room supply growth of around 2% in 2020 and 2021,” he said. “But because of the virus we’ll see a slowdown in some construction activity. And we think that because of an uptick in closures, that will mean that for the next couple of years you’re going to see room supply growth slow.”

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