HENDERSONVILLE, Tennessee—Every month since 2002, STR has published pipeline reports for the United States hotel industry. The majority of records comes each month from the chains’ data feeds, which show the rooms and projects under contract by the major brands. Simultaneously, we talk to architects, developers and local planning departments to gain better insights into open dates and development progress of specific projects. (STR is the parent company of Hotel News Now.)
One of the interesting questions to examine is the relationship between the pipeline data and the net new rooms that opened. What is the ratio of rooms under construction versus new rooms that open in a year? What is the relationship of rooms that are supposed to open in a certain year and the number of rooms that actually opened?
Given our deep data set, we are able to examine these and other questions. We used the December pipeline data for the 10 prior years between 2006 and 2015, which covered two recessions and two time frames leading up to the strong years of 2007 and 2014.
Rooms under construction vs. rooms that open
Tracking the rooms under construction gives a good indicator of how many rooms actually open. But what is the exact relationship?
We have to keep in mind that rooms being built still have a while to go before they are actually open for business. Based on the attrition rate, it stands to reason that not all rooms under construction actually open. Not completing a started project is quite rare, but historically it does happen.
Looking at the past relationship between rooms under construction and the net rooms that opened two years later yields the following ratios by year.
Net new supply is defined here as the number of rooms that opened minus temporary, seasonal and permanent closures.
Not surprisingly, the macroeconomic environment has an impact on the completion rate of projects. Whereas the ratio of rooms under construction in 2006 compared to those that opened in 2008 is almost 90%, the ratio then slipped through the Great Recession. Even though fewer than 100,000 rooms were being built in 2009, in 2011 we only recorded just fewer than 11,000 net new rooms, a ratio of just around 11%. This is probably a function of developers pushing opening dates out as far as possible to avoid opening into a weak demand environment.
As the macroeconomic and lending sentiment—and equally important developer confidence—improved, rooms under construction steadily increased between 2010 and 2013, from just below 52,000 rooms to more than 91,000 rooms. The pipeline increase during a healthy demand environment yielded a much higher ratio of net rooms to under construction rooms, including 80% in 2015. The overall average ratio is 52%.
One rough way to interpret this ratio is that half of the rooms being built are open two years later. Excluding the wild recession rollercoaster and only focusing on the last three years changes the ratio meaningfully to 67%. One way to read this is that after netting out closures and openings, two-thirds of all rooms under construction are open two years later.
Relationship of rooms with a specific open year vs. rooms opening that year
As part of the pipeline verification effort STR continually updates projected open dates. We can then examine pipeline rooms with a certain year’s open date and the actual number of rooms that opened that year to establish ratios. These ratios give us a better sense about how meaningful the future open dates are. We first started summarizing this data set in 2007.
In our pipeline we gather open dates for most projects up to three years out. For example, at the end of the year 2011 we tracked projects with an open date for the years 2012 through 2014. The table below shows the projects with open dates starting in 2009; for ease we have limited our discussion to rooms with an open date two years out.
We can now determine the ratio of rooms that have an open date two years out and the net number of rooms opened in that year. The average back to the year 2009 is 37%, but just like in the last analysis, this number is skewed because in 2009 and 2010 many projects were deferred. A more realistic average over the last three years shows that the ratio of rooms with a projected open date two years out versus the rooms that open in that year is 42%. In other words, when forecasting a number of net rooms to open in any given year we can look at our pipeline projected open date and divide it roughly by half to get a sense of the magnitude of openings.
As with all these ratios it is always worth repeating that the macroeconomic cycle and the lending environment act as accelerators or decelerators of these trends. We are in a fairly healthy environment, so it stands to reason that projects under construction or with a projected open date in the next two years will likely open on pace with the ratios we established here.