Hotel Building Boom Stalls As Demand Plays Catchup

By Sharon Nunn, Chris Kirkham and Sarah Chaney Features Dow Jones Newswires

Hotel developers are slowing down new U.S. construction projects after years of rapid growth, a result of tighter lending conditions and a ballooning supply of rooms in large markets.

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Though consumer demand remains healthy, hotel construction spending was down 2% to $27.5 billion in June at a seasonally adjusted annual rate from December, according to Census Bureau data, after more than tripling since bottoming in 2011. A combination of increased travel spending, growing consumer confidence and cheap credit prompted developers to pour money into hotel-construction projects in the aftermath of the 2007-09 recession. Now, growth in new hotel rooms is outpacing the number of consumers able to stay in them in cities like New York, Houston and Miami, prompting banks and developers to take a breather.

"As soon as they started seeing a lot of cranes in the air, people started getting cautious again," said Inigo Ardid, co-president of Key International, a Miami real-estate investment and development company that develops hotels throughout Florida.

Overall growth in the U.S. hotel room supply has been slower in recent years than it was going into the last downturn, but there has been rapid growth in the nation's largest markets, leading to pockets of oversupply. Hotel room supply has grown at 2.5% in the nation's top 25 markets so far this year, according to STR Inc., a data company that tracks the hotel industry, compared with 1.5% in all other markets.

Adding to the challenge: Construction labor shortages have pushed up the cost of building new hotels at a time when revenue growth for hotel rooms across the U.S. is also beginning to slow.

"That kind of one-two punch doesn't make it exciting to build another hotel," said Mark Laport, president and chief executive of Concord Hospitality Enterprises Co., which develops, owns and manages properties across the U.S. for most of the major U.S. hotel chains.

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Banks tightened commercial real estate lending standards in the second quarter across categories including construction, nonresidential and multifamily development, according to a July survey of 76 U.S. banks and 22 U.S. branches of foreign banks conducted by the Federal Reserve.

David Kong, president and CEO of Best Western Hotels & Resorts, said his company created a dedicated team last year to work with owners and developers who were having difficulty getting construction financing. He said the company has been much more focused on acquiring existing hotels under its brands because "we recognize there are going to be less and less new construction projects."

Some large cities that bounced back early in the economic recovery have seen huge growth in the number of new rooms, dragging down revenues from each available room. New York, Miami, Austin and Dallas all saw declines in revenue per available room for the first seven months of this year compared with a year earlier. Given the pipeline of projects, growth in new hotel rooms is projected to accelerate over the next two years in these four major markets, according to a forecast from CBRE Hotels Americas Research.

Developers said the construction lending environment has tightened as the cycle has gotten longer, with the wounds from the financial crisis and the recession still weighing on many investors' minds.

"If we were going to market with a new project three years ago, we would maybe have had 10 lenders that were interested in the project," said Amit Patel, president of Winwood Hospitality Group, which owns and develops hotels in North Carolina and has an existing hotel investment in Nashville. "That number today is probably closer to three."

Miami's growing supply and recently declining lodging market is a microcosm of the trend and a warning to developers and investors alike; almost 3,500 rooms were under construction in the city as of March, which is 6% of Miami's existing supply, and the city's occupancy rates and revenue per room have ticked down by almost 7% since 2015.

Houston was experiencing similar perils before flooding hit the city this week. The oil-rich city had almost 5,000 rooms under construction as of March 2017, which is 6% of Houston's existing supply. Almost half of Houston area hotel loans are distressed because of declines in hotel room occupancy and dwindling income to pay back mortgages, according to Kroll Bond Rating Agency.

Still, some economic fundamentals still point in the sector's favor. The average annual U.S. occupancy rate at the peak of hotel construction last cycle was 62.8%, and was rapidly declining. By comparison, occupancy was at 65.5% over the last year, which is a slight uptick from a year earlier.

Unlike in past cycles, when developers overbuilt across the board, this last growth period has been much more moderate. Average room supply growth was less than 2% across the U.S. in June, according to STR. That is in line with long-term averages and lower than supply growth of about 3% going into the 2007-2009 recession and 4% growth before the 2001 recession.

Kevin Jacobs, chief financial officer at Hilton Worldwide Holdings Inc., said that kind of growth bodes well for the industry going forward.

"It's definitely a blessing this late in the cycle to be only at long-term averages," Mr. Jacobs said.

Write to Chris Kirkham at chris.kirkham@wsj.com and Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

August 29, 2017 11:48 ET (15:48 GMT)