Project counts in the construction pipeline peaked for the cycle in the first quarter of 2008 at 1,032 projects and 173,042 rooms, then drifted lower. At the third quarter, they stood at 952 projects and 164,577 rooms, down 8% and 5% respectively from the peak.
By LE’s estimate, the European pipeline is on the same downward trend line as the US, but is lagging behind by about a quarter.
The banking crisis has become so pervasive, lending so scarce and the economic slowdown so widespread that we are heading for a global recession. In Europe, it has recently triggered a ratcheting downward in the industry’s operating performance to a lower descending trend line.
The cumulative evidence indicates that project counts in the European construction pipeline will continue to fall, at least until 2011, before reaching their lowest level.
There are 519 projects and 90,301 rooms presently under construction.
At 55% of the total pipeline, this is high and reflects the rush by developers throughout 2007 to secure financing and get into the ground before the banking crisis worsened. As a result, quarterly new construction starts peaked in the first quarter of 2008 and have declined precipitously since then.
Most projects already in the pipeline cannot migrate towards construction, but are stalled in the scheduled starts in the next 12 months and in the early planning stages. It’s a sure sign that the lack of financing at reasonable rates and terms is having a braking effect on lodging development.
Another sign is project cancellations, which are rising rapidly. It’s not only marginal projects that are being cancelled but once-solid projects that can’t obtain affordable financing or are no longer considered feasible due to concerns about declining operating trends.
Most of the projects that are advancing are smaller, three and four-star projects with less than 150 rooms, in outer suburbs or smaller cities where financing can be accessed at local institutions. When available, rates and terms are much stiffer than a year ago.
Another metric that plots developer sentiment is new project announcements (NPA). NPAs are off sharply from the fourth quarter of 2007 peak and are at a six-quarter low, with expectations of continued lower trends for the immediate future.
Many developers have turned cautious and are taking a wait-and-see attitude until there’s greater clarity about the economy. That said, it’s still an opportune time for those that have the wherewithal to invest and are not overly dependent on leverage.
On the continent, branding is the dominant trend. In 2007, 82% of all new hotel openings selected either a global or a regional brand.
Franchise sales teams have refocused efforts towards the growing mid-market opportunities available. Brands that are sized correctly for the difficult lending environment ahead include Marriott’s Courtyard, Hilton’s Hampton Inn and Garden Inn, InterContinental’s Holiday Inn, Holiday Inn Express and Staybridge Suites, Accor’s Ibis and Etap, Rezidor’s Park Inn, Ramada Inn by Wyndham, and Travelodge.
Selected high-end projects could draw some interest from developers.
It would take four to five years, to about 2013-14, for a project conceived today to reach its grand opening. Luxury projects may well be out of favour in the near term, but for those who are able, it may be a good time to begin planning in order to time entry into the market for the next economic upswing.
2009 and 2010
From the fourth quarter 2008 to the end of 2010, 641 new construction hotels are expected to open. These are nearly certain to occur because as of the third quarter 2008, 519 hotels or 81% of the expected new openings were already under construction.
In 2007, 34,028 new construction rooms opened. 40,093 are expected to open in 2008, 46,525 in 2009 and 53,435 in 2010.
It’s an accelerating pace, but the flow is not excessive. The new supply coming online would have been appropriate for the times, had the economic cycle not been cut short so abruptly by the banking crisis that precipitated the global slowdown.
Today any new supply growth may feel problematic, but it should not overshadow the core problem: the abrupt downshifting of demand with a fall-off in room rates. That’s the primary issue, not excessive supply or overbuilding.
What to expect
The slowdown ahead will be more widespread, deeper and longer than previously envisioned. Beyond the banking and lending crisis righting itself, still ahead of us are deeper business profit shortfalls, further layoffs, perhaps another fall-off in equity markets and balloon mortgages becoming due after the 2005-07 commercial real estate investment period.
Many of these properties will now have values less than their mortgage balance.
All of that uncertainty needs to be absorbed before consumer and business confidence returns. It will take time, which means the bottom for lodging operations won’t be any earlier than late 2010, and another lodging development cycle won’t begin until at least 2011.
The next two years will surely be a difficult time for developers and operators alike.