The number of U.S. hotel rooms under construction in May was 196,000 according to STR, CoStar Group’s hospitality analytics firm, still roughly 10% below the number under construction from a year earlier.
But the trend may be more important than the total in this case as the number of rooms under construction has now increased sequentially for two months in a row for the first time in nearly a year.
After the global pandemic decimated hotel operating results, many lenders and developers remained on the sidelines, hesitant to start a project in an asset class that was disproportionately hit by travel restrictions and the recession.
But STR data shows the recovery in hotel demand is ongoing as more vaccinated leisure travelers take to the road and beaches. In addition, major corporations are asking their staffs to return to the office, at least part time, which should have a positive influence on business and group travel. This, in turn, is expected to fuel new developments.
As in prior quarters, the number of rooms under construction is tilted heavily toward limited-service hotels. Two out of three rooms being built today do not have large food and beverage outlets or meeting spaces. In 2019, this percentage was even higher, but because limited-service hotels are quicker to build, the room count in the pipeline tends to diminish as projects cycle out.
It is our expectation that the ratio of limited- to full-service hotels that are under construction will continue to increase even further, as large meeting-oriented hotels open and drop out of the pipeline, and developers start construction on more limited-service properties.
Hotel construction during the pandemic never really stopped as owners and lenders banked on an eventual recovery. Some large hotel markets were attractive to developers prior to the downturn and the construction room counts indicate substantial supply increases for some of the large, meeting-oriented markets.
New York City stands out with an expected room supply growth of more than 17% over the next few years. The new rooms are projected to open over the next two to three years and probably will have a significant impact on the total market results.
Going forward, we expect the ongoing recovery for U.S. hotels will make new construction more attractive to developers because they can demonstrate to their lenders that better days are ahead. Supply growth will therefore be a topic of conversation for many operators as they brace not only for more guests, but also for more competition.