Construction financing is loosening in the U.S., but it still has a ways to go before new supply reaches its long-run average.
REPORT FROM THE U.S.—The pace of construction is creeping up, but developers say there’s still a long way to go before the infusion of new supply reaches the long-term industry average.
There were 75,620 rooms under construction in the United States as of 31 July, 23.1% from the same period during 2012, according to STR, parent company of Hotel News Now. The number of rooms in the total active pipeline was up 9.1%. The 20-year average is 1.7%.
“It’s improving,” said Gus Stamoutsos, executive VP of franchise development for Wyndham Hotel Group, of the construction landscape. “I am cautiously optimistic. We’re seeing more and more individuals dipping their feet into the new construction area.”
Wyndham Hotel Group’s development pipeline included more than 940 hotels and approximately 112,000 rooms, of which 62% were new construction, as of 30 June.
Growth is spread throughout the system, Stamoutsos said. The economy Microtel brand, for instance, is a new-build prototype that has played well in shale-oil regions where demand is outpacing supply.
“We’ve also seen an increased interest in extended stay,” he said. “We just came out with a new Hawthorn (Suites by Wyndham) prototype for new construction.”
Wilton, New Hampshire-based Roedel Companies has found success in that space as well. The company is preparing to build a new Homewood Suites by Hilton in Berlin, Massachusetts, as part of a planned mixed-used village.
“New construction is difficult. For at least our group, we are looking at it very selectively. What we do, generally speaking, is look at a market that we think is very strong. We’ll take a look at the hotels that are either for sale or could be safe. If the price is higher than what we perceive to be the all-in development cost, that’s when we decide that might be the case to build something new,” said David Roedel, head of business development.
The Berlin project is the only new build in the company’s pipeline, he said. “Only in the last six months have we really focused in on any new development projects.”
Executives are analyzing a few opportunities in Florida, as well as one in New Jersey on a parcel of land the company already owns.
Roedel Companies has acquired three hotels in the past 16 months.
Financing remains the most significant hurdle to overcome for new development, sources said.
“The amount of equity needed to get a project financed—that’s still probably the No. 1 challenge,” Stamoutsos said.
“Most smaller developers tend to be the majority of the brand’s builders … those guys, if you talk to them, you’ll hear that it’s definitely taking longer,” said Deno Yiankes, president and CEO of White Lodging’s investments and development division.
“The equity used to get them two to three projects; now it’s one because of the lower loan to values that the lenders are willing to do,” he added.
Fortunately White Lodging has developed a track record of consistent success with its lenders, meaning the company can churn through development despite broader shifts in the market, Yiankes said.
“One of our trademarks has been consistent development not only in good times but when things slow up, too,” he said.
The developer, owner and operator has $800 million in committed development either under construction or signed in the pipeline, 100% of which is new build. White Lodging has built more than 125 hotels during the past 23 years, Yiankes said.
Also working in the company’s favor is its cluster approach to expansion, he added. Instead of building a one-off hotel in one market, White Lodging’s development team builds three to eight hotels over a five-year period. The approach not only helps amortize the upfront costs accrued in the learning curve with the first project, but it also helps build trust with lenders.
“You’ve got the city’s confidence. You’ve got your operating experience. It just generally comes together a little bit easier,” Yiankes said.
“I don’t know if it’s necessarily gotten easier or harder over the last three years,” Yiankes said. Going forward, however, he expects the construction landscape to open.
“We expect it to be very consistent and stay steady through the next three to five years, based on our pipeline,” he said.
Wyndham’s Stamoutsos expects slow and steady improvement as well.
“My guess is that it’s going to be longer, broader and more steady than in past years where folks went in there and were building like crazy and it stopped like crazy,” he said. “It’s going to be a broader and more steady type of growth.”
Supply is projected to increase 1% during 2013 and 1.6% during 2014, according to STR.
“Right now we’re at a tipping point because lenders are very active in the market,” Roedel said. “They’re seeing overall conditions improve. The cost of money is still fairly low. At the end of the day, it’s very market to market.
“There’s a window here,” he added. “New supply has been at historically low levels.”