CoStar reports that as of November 20, 2024 there are 1,264 hotels with a total of 151129 rooms under construction. This represents approximately 2,6% of the current inventory of hotel rooms in the United States. To put this in perspective, since 2019, the ratio between rooms under construction and total inventory has averaged 2.9 percent per month. The 151,129 construction rooms are the lowest number since August 20, 2022. This was the last phase of building out projects which began before the pandemic. The high interest rates on construction loans combined with relatively expensive construction materials and labor has slowed down development.
CBRE used CoStar’s construction data to analyze the current trend in hotel development. CBRE also compared the hotel investor’s intentions to those expressed in CBRE’s Hotel Investment Intentions in the U.S., May 2024. It was possible to see where the hoteliers prefer to buy versus build.
What is being built?
By November 2024 the United States will be dominated by hotels in upper-midscale or upscale chains. These two categories together represent 50,7 percent of all rooms under construction. These two segments are characterized by a smaller number of amenities and public areas, so the cost of construction and operation is lower than for properties in the upper-upscale and luxury segments. The majority of select-service brands, lifestyle and extended-stay hotels, as well as boutiques, are classified either at upper-midscale, or upscale.
Luxury and upper-upscale hotels require more space and are usually costlier to construct due to their many facilities. This translates into higher construction costs and, therefore, requires average daily rates which are difficult to achieve within today’s operating environments. The total number of rooms being built is 10.7% for upper-upscale hotels, and 5.3 % are luxury hotels.
About 18.3 per cent of hotel rooms under construction will operate independently of any brand. Hotel owners begin to doubt the brand’s value as the licensing costs increase. The technology has helped hotels to improve their marketing abilities and develop their loyalty programs.
In the past, hotel developers did not build hotels for these segments. In the past, developers have not built new hotels in this segment. Recent success in these hotels has led to the creation of new brands of moderately priced extended-stay properties. The new brands are causing some people to be interested in the construction of new extended-stay midscale or economy properties. The combined midscale and economic projects account for 15 percent of all hotel rooms under construction currently in the United States.
The decline in average hotel size in development is a symbol of the trend towards smaller and more affordable properties. In 2024, the average hotel size will drop from 132 to 118 rooms.
What and when?
Nashville is the worst affected market, with a construction pipeline that represents 7.2% of current supply. Nashville’s ratio has been above average for 15-20 years. Yet, the market has maintained its performance.
Indianapolis, New York City, Tennessee Area (Dallas), Jacksonville, Arkansas Area and Phoenix are other markets that have construction ratios over 5 percent. New York is the only high-density market in the group. Recent restrictions on short-term rentals and the conversion of hotel properties to commercial real estate have attracted developers who can afford to construct a hotel. The majority of the other markets within this group can be found in the Sunbelt, with relatively lower development costs and entry barriers.
In contrast, the number of hotel rooms currently under construction is just.3 % of what’s already available in San Francisco/San Mateo. This is a market that is expensive to develop, yet the operating performance is low and expected to stay so.
The impact of hotel room expansion will be most noticeable in two more years. In 2026, the construction of 190,464 rooms is scheduled to be completed. The 105,957 planned rooms to be opened in 2025 and 106,070 slated rooms to be open in 2020 are far less than this.
Building vs. Buying
CBRE conducts an annual survey of hotel investors to gauge their interest in hotel investments. The survey asks questions about the types of hotel to be bought, the preferred market areas and the motivations behind the decisions.
CBRE’s survey of investors in May 2024 revealed that they were more inclined to purchase hotels from the higher-end segment, which was in line with the low level of new construction in this sector. Most likely, the cost to build and finance a big-box hotel is the main factor that influences investors’ decisions.
Comparing the construction pipeline with investor intention, a difference in appetite for building or buying is evident. In general, large markets like San Francisco, Miami and Boston are more likely to be targeted for new construction than smaller ones.
New York City is the exception, where developers have both invested and are planning new construction. New legislation, however, will increase the difficulty of building new hotels in New York City after current pipeline projects are completed, because the law allows hotel unions to block non-union development.
The impact of opening new hotels is predicted to be small for at least the next 2 to 3 years, as construction and financing costs are expected to continue to rise. Hoteliers should be aware of the market and segment conditions, because the decisions made in Nashville for investment and development are not the same as those in San Francisco.
