The U.S. hotel supply continues to grow at a record pace, even with the industry facing its worst downturn in recorded history. But the building boom’s days are numbered.
Many hotels around the world are temporarily closed due to the coronavirus downturn in travel. But looking at hotel construction sites around the U.S., you wouldn’t know the worst economic blow to the industry is underway. The number of U.S. hotel rooms under construction hit a record high of 215,000 in March, according to STR. The record was again eclipsed in April — the first full month of widespread travel restrictions in the U.S. — when the number swelled to 220,000. Eventually, the pandemic will catch up with hotel development, STR Senior Vice President of Lodging Insights Jan Freitag said.
“I think this is going to deteriorate,” he added. “We will not see a rapid acceleration, but it’s going to come down.”
Hotel executives like Marriott CEO Arne Sorenson used first quarter earnings calls to recognize coronavirus has been the worst downturn for the hotel industry in recorded history. But Sorenson also said he felt the worst of the pandemic and ensuing business downturn was in the past and that there were early signs of a recovery. Even STR shows U.S. hotel occupancy rates ended the week of May 16 at a little more than 32 percent, the fifth consecutive week of increases and an improvement from the early days of the crisis when some hotels were posting single-digit occupancy rates.
Wyndham Hotels & Resorts’ midscale properties are running at 50 percent average occupancy levels, the company’s CEO Geoffrey Ballotti said Sunday on CBS’ Face the Nation. Ninety percent of Wyndham’s 6,300 hotels have remained open during the crisis, Ballotti added. Wyndham has also added to its portfolio this year, opening 11 hotels in the first quarter and even breaking ground on six new properties between March 11 and May 3.
“Despite a rapidly changing landscape for hotel developers around the world, a number of our owners are pressing forward with new-construction projects in the economy and midscale segments, reinforcing our overall confidence in the long-term viability of our industry,” Wyndham Head of Architecture, Design, and Construction Krishna Paliwal said in a statement.
Choice Hotels grew its pipeline by 2 percent in the first quarter to more than 1,000 domestic U.S. hotels. Recognizing coronavirus could lead to slower growth, Choice Hotels Chief Financial Officer Dominic Dragisich said in a first quarter earnings call he still expects the company to grow through the end of the year due to its concentration of economy-scale brands that appeal to operators.
Marriott opened more than 14,000 hotel rooms in the first quarter and has a 516,000-room development pipeline, Sorenson said on the company’s first quarter earnings call while recognizing some future openings would be delayed due to the crisis. Marriott declined to provide Skift specific data relating to what openings and groundbreakings have occurred since the pandemic began.
A Runway With a Clear End in Sight
While occupancy and daily rates may show signs they have bottomed out, construction will take longer to bounce back from what Freitag sees as an inevitable decline. Global hotel companies may be throttling through uncertain times in the industry with more groundbreakings, but this also happened in the last recession.
“Eventually, it’s going to follow the pattern we observed post-2008 recession where, in December 2007, the number of rooms under construction peaked at 211,000 — that was the highest we had recorded at that point — and then declined rapidly over 3.5 years to a low point in May 2011 of 50,000 rooms,” Freitag said.
The supply that delivered during the 161,000-room descent between peak and trough were mainly hotels already under construction when the recession first hit. While he says there is a chance May could be yet another record month for U.S. hotel construction, Freitag added there are already signs the development pipeline is beginning to cool off.
The number of U.S. hotel projects moved from the planning stage to a deferred status spiked from one property in February to 21 in March, according to STR. Another 17 were deferred in April. There have been fewer outright cancellations but a similar spike, going from only two projects moved from the planning stage to cancelled in February to seven in March and settling down to three in April.
“When you have maybe a piece of land or are talking to lenders and getting preliminary renderings and then the bottom falls out, that’s when you hear project makes sense in best of times. But this is not the best of times, so it begins to make sense to say, ‘Let’s hold off,’” Freitag said. “Deferrals, where a developer thinks maybe this will still happen in 2021, may even just be wishful thinking.”
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