The Fed’s interest rate cut is making construction loans cheaper, and the eventual outcome is likely that new hotel projects will move from the planning phase to breaking ground. As of early September, the number of rooms in the planning phase stood at 330,000, a roughly 40% increase from a year ago. Now that the Fed has cut its federal funds rate and signaled future cuts, developers can talk to lenders with the expectation that construction loans and permanent debt will be cheaper.
Of the 330,000 rooms in the planning phase, around 121,700, or 37%, are in the larger top 25 markets. This is slightly higher than the share of existing rooms in those markets, which is 35%. The larger share of planned rooms implies that in the future, the top 25 rooms will grow the share of rooms relative to all other markets.
The 121,700 rooms equate to a possible supply growth of over 6%, should all rooms eventually open. Seventeen of the top 25 markets show a potential supply growth of over 5%. However, the supply growth is expected only gradually and depends on the costs of materials and the availability of construction labor. The first projects currently in the planning phase will not open until mid-2026 at the earliest.
Nashville, Tennessee, and Miami are the two markets that have a planned room count of over 10,000 rooms. Should these rooms come to fruition, it would equate to a supply change of just under 20% and 16%, respectively. Even if the supply growth is spread over three years, the annual supply growth would still top 5%, much stronger than in the most recent past. These two markets are characterized by strong demand increases over the last few years, driven by robust leisure, group and corporate transient demand. However, both markets have been the “darling” of the development community for quite a while, and any new supply will further impact the occupancy and pricing power of managers and owners.
The four markets with a potential supply change of under 3% are Minneapolis (1.2%), Las Vegas (1.7%), Orange County, California (2.5%) and Chicago (2.6%). Minneapolis and Chicago have been hard hit by the value deterioration of existing hotel properties, so developers may feel that it is more advantageous to buy rather than to build. In Minneapolis, the price per key dropped 14% from 2019; in Chicago, that drop was 4%.
Las Vegas is traditionally a market characterized by large-scale developments comprising thousands of rooms in a single property. The absence of a mega project in the planning phase could change quickly, and then the current low ranking within the top 25 markets may not hold for long. Orange County has seen little development over the last few years, and only around 1,000 rooms have been added since January 2019.
Looking ahead, the expected further rate decreases will impact the number of projects from the planning phase to breaking ground. At the same time, more projects will likely materialize, and the planning pipeline should remain robust with projects that had not even been contemplated earlier this year. The industry's supply change is expected to be muted through mid-2026, but for some top 25 markets, new openings will accelerate to levels not seen in a while.