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PORTSMOUTH, NH - Lodging Econometrics (LE), the Industry Authority for Hotel Real Estate, has announced that New Supply Growth in the nation's 25 Largest Markets will fall to 127 hotels/16,278 rooms in '04, down from 147 hotels/26,227 rooms in '03 - a 42% Year-over-Year room count decline.
Patrick Ford, President, stated, "It's the sixth consecutive annual decline from the peak reached in 1998, when 474 new hotels with 57,994 rooms were added."
Also notable, the average size of a new hotel opening fell significantly from 178 rooms in '03 to 128 in '04." Ford explained, "This reduction in average room size underscores that large hotel development has almost completely waned in CBD locations and that developers are now focusing on much smaller properties in outer suburban and highway locations."
LE forecasts Supply Side Growth in '05 for the Top 25 Markets to increase slightly to 139 hotels/17,049 rooms. Its newly released forecast for '06 calls for an additional slight increase to 151 hotels/20,105 rooms. "Supply increases in both years are so modest," said Ford, "that they are of little consequence but are more reflective of a three-year-long bottoming formation for new supply additions, similar to what the Industry-wide Construction Pipeline experienced over the past few years."
These Supply Side Forecasts are a result of LE's latest quarterly examination of all 197 markets and 593 market tracts throughout the country, and were recently reported in LE's 3Q 04 Lodging Development Forecast and Trends Report.
Demand Growth Greatly Exceeds Supply Growth
Demand growth rates will exceed supply growth in 24 of the 25 Top Markets in '04. For '05 and '06, Industry-wide demand growth is estimated at ± 2.8%. In '05, Washington, D.C., Norfolk, and St. Louis are the only markets forecasted to have supply growth in excess of that 2.8% demand growth benchmark. In '06, only Seattle, Tampa, and St. Louis will exceed it. Ford said, "With the exception of Norfolk, demand growth in each of these markets is growing fast enough to more than comfortably absorb their forecasted supply increases."
Operating Performance in the Top 25 Markets is Leading the Industry Turnaround
"In the Top 25 Markets, the rate of demand growth is more than twice as fast as the rest of the Industry," said Ford. "When coupled with low levels of New Supply, these important markets are leading the Industry's recovery and leveraging Industry-wide performance statistics." Operating performance for these bellwether markets has a catalytic effect on other markets, and is closely watched by hotel operators, developers, capital markets and the investment community.
Through '05, the following markets are expected to outperform Industry-wide recovery trends: Anaheim, Los Angeles, Miami, New York, Oahu, Orlando, Phoenix and Washington, D.C. Ford explained that four of the markets, Anaheim, Los Angeles, Miami and Oahu, "are particularly strong and will have fully-recovered by year-end '04, matching their operating performance statistics in the "bubble" year of 2000." The remaining four markets will recover fully in '05.
Markets that are expected to model the Industry-wide recovery are: Atlanta, Boston, Dallas, Houston, Minneapolis, New Orleans, Philadelphia, San Diego, San Francisco, Seattle and Tampa. "San Diego is performing better than expected. Strong spring and summer months were experienced in Boston, Minneapolis and San Francisco, which sparked recovery in those markets," said Ford. "Houston is appearing more sluggish than anticipated as it is having difficulty absorbing supply that came on-line in anticipation of the Super Bowl and the All-Star Baseball Game earlier this year."
Underperforming markets, where demand is proving slow to build, are Chicago, Denver, Detroit, Nashville, Norfolk and St. Louis. Room rates continue to lag in Chicago, Denver and St. Louis, while absorption problems with earlier supply additions in Denver and Detroit are an added drag on their recovery.
Forecasted Supply Growth in the Smaller Markets is Benign Too!
LE's proprietary database contains details for every new construction project in the country, including the critical start and estimated completion dates, which are updated each quarter. Using this research, LE has created a three-year forecast for Supply Growth for each of the nation's 197 Markets. In '05, only 28 of the remaining 172 markets will register supply growth greater than the "consensus" demand forecast of 2.8%. In '06, just 35 markets will exceed 2.8%.
In Summary
"Overall," said Ford, "Supply Side Growth in the Top 25 Markets will remain benign at least through '06. Both '05 and '06 should be strong years for recovery throughout the economy. As guestroom demand continues to grow, the Top 25 Markets will lead the Industry, contributing greatly to its recovery and will provide a unique leveraging influence on Industry-wide operating statistics as occupancy and ADR improvements accelerate over the next few years."
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