The total number of hotel rooms in the construction pipeline will likely decelerate for the next three to four years until more meaningful construction and lending activity resumes in the U.S., data from STR shows.
HENDERSONVILLE, Tennessee—The total number of rooms in construction in the U.S. at end of September declined from previous months and is a sharp deceleration from April’s peak, according to data from STR.
(STR is the parent company of Hotel News Now.)
Jan Freitag, STR’s SVP of lodging insights and CoStar’s national director for hospitality market analytics, said during a video overview of STR’s third-quarter pipeline data that the number of rooms in construction at the end of September stood at 216,000, down from the 217,000 rooms recorded the previous month.
The 220,000 rooms in construction during April is the highest STR has ever recorded, he said.
Freitag said the number of rooms under contract in September stood at 652,000, which is a 0.8% decline from 2019.
“We take that as an indicator that the total pipeline volume is going to decelerate over time. What that could look like we have charted here. The prior peak was in December of 2007 where the total number of rooms peak just under 212,000. And over the next three and a half years, the number of rooms in construction declined to just around 50,000,” he said.
Freitag added it is not a stretch to imagine that in this part of the cycle the industry is in now, the number of rooms in construction will decelerate for the next three or four years before more meaningful construction and lending activity picks up.
Another indicator pointing to a total pipeline slowdown is that the unconfirmed rooms pipeline is also decelerating, he said. The year-over-year percent change is now negative compared to the same quarter in 2019.
“These are not projects that we are getting from a chain feed but that we stumble upon in our searches on the internet and through construction activity that architects tell us about,” he said.
However, Freitag said what is being built has not changed over the past few years. A total of 71% of all rooms in construction are limited service. There are only about 40,000 rooms that are considered full service, luxury and upper upscale, he added.
“Really the activity of construction has, was and likely will be in the upscale and upper-midscale segment,” he said.
When looking at the ratio of rooms in construction compared to the total inventory in the chain scales, upscale and upper midscale have the majority of rooms in construction but also have a very strong percentage of existing growth, he said.
Freitag said September’s luxury numbers (13,064 rooms in construction and 12% of existing supply) might be surprising to some and the upper upscale-numbers (30,115 rooms in construction and 5% of existing supply) might seem high to some. But it’s important to note “that for luxury and upper-upscale hotels, the total inventory currently is depressed because of temporarily closed hotels.”
“That percent is likely overstating the reality of what the growth rate will actually look like in the future,” he said.
STR is also tracking the number of rooms that are abandoned and deferred. Not surprisingly, COVID-19 has had a “very sharp impact on lending and on owners’ appetites to move forward with the project.”
For more of Freitag’s insights from STR’s Q3 pipeline data, watch the video below.
Editor’s note: The video included in this article was filmed by Jan Freitag, STR’s SVP of lodging insights and CoStar’s national director for hospitality market analytics, on 14 October and edited and produced by CoStar Group. HNN is a division of STR, a CoStar Group company.