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Hotel Guestroom Supply is Actually Shrinking in Some
Markets; 11 of the Top 25 Markets Show Negative
Supply Growth Through the First half of 2005
 Lodging Econometrics

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Supply Side Forecast for 2007 Shows 100,000 New Guestrooms to Open;
'07 Expected to be a Second Record-breaking Profit Year in a Row

PORTSMOUTH, N.H. - July 14, 2005 -- Lodging Econometrics (LE), the Industry Authority for Hotel Real Estate, has released for the first time, its supply growth forecast for 2007 in its mid-year report to the lodging industry. Additionally, LE revised its forecast for supply growth in both '05 and '06 after reviewing over 3,000 project records in the Development Pipeline with individual Developers and re-verifying anticipated start and completion dates with various Brand Managers.

Patrick Ford, President, said, "LE forecasts that 917 hotels with 100,559 guestrooms will open in '07. That's the highest total for new openings since '01, but far removed from the peak set in 1998 when 1,532 hotels with 156,471 rooms opened. Because the supply increase forecasted for '07 is modest - just 16,101 more rooms than '06 - and because the industry has already seen 26 consecutive months of improved demand, which is expected to continue well into the expansionary phase of the present cycle - 2007 is on track to become the second record-breaking profit year in a row. It's expected to exceed the record $26 billion anticipated for '06."

                NEW CONSTRUCTION OPENINGS
--------------------------------------------------------------
                             Hotels                Guestrooms
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  '07 (E)                      917                    100,559
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  '06 (E)                      778                     84,458
--------------------------------------------------------------
  '05 (E)                      701                     70,646
--------------------------------------------------------------
  '04 (A)                      555                     58,420
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                               Source: Lodging Econometrics

Ford said, "There are few New Hotel Project Announcements entering the Pipeline in CBD's of major cities. We're still too early in the cycle. In many markets the economic recovery has not been broad enough to produce sufficient job growth, so business travel, although improving, has not as yet fully recovered or pricing power completely returned. LE estimates that by the end of 2005, between 10 and 12 markets of the Top 25 will still not have fully recovered to pre-9/11 operating levels. That indicates that there is still room for additional industry profitability growth towards the back end of the decade."

The majority of Planned Construction growth is scheduled to take place at highway locations, in smaller cities, and in the outer suburbs of larger cities - mostly in the Upscale, Midscale w/o F&B, and Economy segments. The leading Upscale brands are Marriott's Courtyard, Residence Inn and SpringHill Suites with a combined 50% Construction Pipeline share within the chain scale, and Hilton's Garden Inn and Homewood Suites with a 33% share. Holiday Inn Express, with a 29% share, and Hampton Inn and Suites, with 22%, are the fastest-growing brands, along with Comfort Inn and Suites in the Midscale w/o F&B segment, while Microtel, with a 46% share, is the Economy leader.

Guestroom Supply is Actually Shrinking in Some Markets

58,240 new guestrooms were added in 2004, resulting in a reported 1% net supply increase, after guestroom removals from the Census inventory. Although 70,646 rooms will be added in 2005, early indications are that net new supply growth will actually finish below 1% this year.

Ford said, "Despite a modest flow of New Hotel Openings, 11 of the Top 25 Markets actually show negative supply growth through the first half of '05, up from six markets in '04. The reason is that a significant number of guestrooms are going 'off market.' In many markets, hotels are temporarily closed because they are being reflagged and/or are undergoing extensive renovation programs. In the Southeast, it's because of damage incurred during last year's hurricane season."

A large number of functionally obsolete properties from the '50's and '60's - particularly in resort communities and in many smaller markets - are being forced to close by a newer generation of products in the Midscale w/o F&B and Economy segments that are more contemporary and have greater consumer appeal.

In larger tourist destinations, like Anaheim, Orlando, Phoenix, and Hawaii, along with the Florida and California coasts, and at golf and ski destinations, old properties with prime locations are sometimes being demolished for new hotel construction, but more often than not, for condominium projects that will serve as primary or secondary residences.

In urban centers - financial and technology centers are the best examples - in cities like Washington, DC, New York, Boston, Miami, San Francisco, and Los Angeles - some hotels are converting a portion of their guestrooms into residences. Ford said, "Across the country, there are 28 existing hotels known to be joining the Condo Hotel bandwagon. Seventeen are converting a percentage of their guestrooms into residences, while another 11 are completely converting to 'Condo Hotels,' selling their entire guestroom inventory as individual condominium investments."

Ford continued, "In the New Construction Pipeline, 101 hotel projects are planning to include a residential component. Another 46 will be pure Condo Hotel projects, selling their guestroom units as individual condominium investments."

Adding a residential component to a new high-end, full-service hotel project, or planning to sell the completed guestrooms as individual condominium investments is one way large hotels can be built this early in the Development cycle. The early sales proceeds provide comfort to both the developer and the lender; enabling the project to carry less long-term debt and improving the project's overall feasibility.

Ford said, "These are classic examples of where all types of real estate migrate to their highest and best use, to provide the highest and best return on invested capital. In some cases, that means residential and condominium development as a replacement for, or an enhancement to, hotel development."

In a number of markets, the first wave of new supply additions in this new up-cycle will go to replace "vanishing" inventory before contributing to any positive net new supply growth. This overall refreshing of the industry's inventory is good news for investors, operators and consumers alike.

Leading Hotel Companies in the 50 Largest Markets

Because it's the strategic planning season, LE separately studied all Hotel Construction and Reflagging project records for the leading companies that have an array of brands across the various chain scales in the 50 largest cities. These markets are important because they are the top economic and leisure destinations in the country and therefore are the top targets for brand distribution and marketplace presence. The study revealed:

  • Marriott has the most projects and guestrooms in the Development Pipeline in these markets with 189 projects/31,335 rooms. Hilton is second at 183 projects/26,682 rooms. Marriott has the dominant development position in 19 of the 50 markets; Hilton leads in 16 of the markets while Starwood follows in nine.
  • Marriott has the most Open and Operating Hotels (Census) with 1,310 hotels/263,272 rooms, followed by Hilton with 1,125 hotels/224,126 rooms. Marriott has the most hotels in 31 of the 50 markets, Hilton in 14 and InterContinental in two.
"It's a neck and neck battle for market share between the two giants, Marriott and Hilton," said Ford, "but the Development Pipeline indicates that Marriott is likely to retain its overall lead in the nation's largest markets, at least through the end of the decade."

Starwood has etched out an interesting industry leadership position in the major markets. Its Real Estate Group has a dynamic commitment to mixed-use development. In the Luxury and Upper Upscale segments, Starwood's brands - St. Regis, the W, Westin, and Sheraton - combine for a total of 53 hotels in planned construction, leading all other companies. Interestingly, 24, or 45% of the projects will include residences or condominiums, either within the hotel or in an adjacent building.

For the remaining 112 smaller markets, InterContinental has the deepest Development Pipeline with 356 hotels/30,934 rooms, largely due to its Holiday Inn Express brand, the fastest-growing brand in the country. Hilton is second with 253 hotels/26,536 rooms - impacted by its strong Hampton Inn programs at highway locations, in smaller cities and in the suburbs of the major markets. Marriott follows with a lower 199 hotels/25,173 rooms, primarily because they don't always choose to pursue the development of smaller projects in non-strategic markets.

Lodging Econometrics (LE) of Portsmouth, NH is the Industry Authority for Hotel Real Estate. LE maintains over 80,000 individual database records throughout the U.S. and Canada.

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Contact:

Lodging Econometrics
Portsmouth, NH
(603) 431-8740
www.lodging-econometrics.com
 

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Also See: Falling New Hotel Supply Additions in the 25 Largest U.S. Markets Are Boosting Industry-wide Operating Results / Lodging Econometrics / February 2005
Net New Supply Growth for all 50 States Expected at 1.2% in 2004; New Hotel Openings in the Last 12 Months Totaled 131 hotels / 22,997 rooms the Lowest Number in the Top 25 Markets Since the Mid-90s / Lodging Econometrics / July 2004


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