Lodging Econometrics Releases Q4 2008 Report for the Global Hotel Construction Pipeline

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(News Source: Lodging Economics)

(PORTSMOUTH, NH) -- Except for a few countries, Construction Pipeline totals worldwide peaked for the cycle by Q2 2008. Sensing an economic slowdown and an impending financial crisis ahead, developers hurried to announce their projects into the Pipeline and, if financing was already secured, rushed to get construction underway.

Since Q3 2008, worldwide economic growth has declined precipitously and a corrosive banking crisis has emerged, creating a collapse in confidence and severely hampering business and leisure travel. Lodging operating performance for Open and Operating (O&O) hotels has been seriously impacted. Moderate at first, the rate of occupancy declines have now quickened. Room rates are eroding as well. In many countries, the declines are steep. Consequently, RevPAR is off substantially, falling at rates not experienced in years.

Amidst these growing concerns, developer sentiment is falling. Pipeline project counts have tumbled from Q2 2008 peaks. Many projects already in the Pipeline have been unable to migrate forward towards construction as financing has all but dried up. The exceptions are some smaller projects that are able to access local lending. Cancellations and Postponements have skyrocketed. Operating performance of current O&O hotels is also affecting project feasibility. New Project Announcements into the Pipeline have fallen rapidly to new cyclical lows. Finally, a record number of projects exited the Pipeline in 2008 as New Hotel Openings. They should continue strong in both 2009 and 2010.

There has been unprecedented governmental intervention worldwide to help recapitalize financial institutions in order to bolster lending and fiscal programs to rebuild the infrastructure, stimulate consumer spending and prevent essential industries from failing. All interventions are designed to arrest and slow the dramatic rate of economic decline visible most everywhere, so that a bottom can be reached.

The International Monetary Fund is calling for a worldwide contraction in economic output of between 0.5 and 1.0% in 2009, the first drop in 60 years, to be followed by a modest recovery in 2010. Most eyes are on the U.S., as it is at the epicenter of the global slowdown and is likely to be the bellwether signaling future improvements. Meanwhile, there is considerable political speculation about whether global programs are too expansive or if they are not expansive enough.



With the world deleveraging, it has become a demand-starved recession as business and consumer balance sheets reset, goods and services are repriced, and real estate values descend. A new lodging real estate cycle will begin when the current mortgage crisis clears, lodging real estate revalues, and an improved lending environment is established.

Transaction activity will be the first to revive as it will be less expensive to buy than to build. Distressed assets will be plentiful and represent a significant buying opportunity for investor groups. Many newly constructed hotels and those that underwent renovation and repositioning programs are likely to be in search of refinancing and, perhaps new, monied partners.

Significant assets in key markets will be available, as will portfolios of midsized branded hotels. M&A opportunities should be meaningful, as the leadership roster of global and regional companies, brands and investor groups will likely be reordered. Once in a lifetime acquisition opportunities will emerge, as a new group of investment funds assemble and enter the industry to take advantage of the next economic upswing. If history is a guide, the period of opportunity could last up to 2 years.


Construction Pipeline At Q4 2008

Since peaking in Q2 2008, the Total Global Construction Pipeline has declined 10% by projects and 12% by rooms to 9,747 projects/1,604,772 rooms at the end of Q4 2008. All regions worldwide are now falling, some at a faster pace than originally anticipated. This is largely attributed to the global recession, lack of available financing and a deteriorating lodging operating environment.  The Asia Pacific region, notably China, and the Middle East, United States, and South America show the swiftest downward movement.


Forecast for New Hotel Openings

In 2008, 2,811 new hotels/392,941 rooms came online worldwide as New Supply. Nearly 40% of New Openings were in the United States, which added 153,411 new rooms. Asia Pacific accounted for 38% of new global additions and reached a cyclical peak in 2008 with 907 hotels/150,559 rooms. A large number of these New Openings were in China due to the travel boom expected with last summer's Olympic Games. In most other regions, New Openings are expected to reach cyclical highs in the next two years, as many projects were seeded earlier in the decade and able to acquire financing before lending was curtailed. LE expects 2,758 hotels/411,570 rooms to open in 2009, and a further 2,639 hotels/435,133 rooms in 2010. Except for Asia Pacific and the United States, which is poised to peak in 2009, most other regions are expected to hit a high for New Openings in 2010. While still substantial, LE's Global Forecast for New Openings has already been adjusted downward to account for the steep decline in Construction Starts, the rapid increase of Cancellations, as well as the pronounced fall off of New Project Announcements into the Pipeline that have affected nearly every region of the world. Further downward adjustments through 2009 are expected.





Key Metrics

Since peaking in Q4 2007, Construction Starts have trended downward over the past year and are now at 536 projects/73,527 rooms. The evaporation of financing worldwide has severely impeded the forward migration of projects toward construction, particularly in the United States, Europe, the Middle East, and Asia Pacific. LE expects projects will continue to be stalled in the Scheduled Starts in the Next 12 Months and Early Planning stages until bank liquidity improves and lending resumes.



Since their cyclical low in Q4 2007, Cancellation/Postponement trends have accelerated to a high of 738 projects/148,902 rooms at the end of Q4 2008. The United States accounted for 51% of all cancelled rooms this quarter. 26% were in Asia Pacific. Counts were proportionately heavy in Dubai and Macau, which had high concentrations of large, four- and five-star projects cancelled. Such projects are nearly impossible to finance in the current lending environment.

New Project Announcements (NPAs) into the global Pipeline have been trending downward and are now in a bottoming formation. They stood at 993 projects/138,840 rooms in Q4 2008. There was a slight 18% increase in NPA's quarter-over-quarter (QoQ). Many developers have withdrawn to the sidelines and will likely remain there until the economy rebounds, lending resumes, and lodging demand improves. However, those that are continuing to develop are focused on projects that are smaller-sized (under 200 rooms) branded projects in the select service segments, where financing is more readily accessible. The Upscale and Midscale without Food & Beverage segments accounted for 49% of all NPAs in Q4 2008.

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