U.S. hotel development dips in third quarter

By Jeannine DeFoe
Bloomberg News Service

NEW YORK — U.S. hotel development is at its lowest level in eight years because of a lack of financing brought on by a drop in occupancy and room rates, according to Lodging Econometrics.

The number of hotels under construction, scheduled to break ground in the next year or in early planning fell to 1,922 in the third quarter, a drop of 4.8 percent from the previous quarter, the research and brokerage company said.

The last time the number was less than 2,000 was in 1994. The number of rooms being built fell 2.9 percent to 272,531, down 50 percent from the peak in 1998.

The U.S. hotel industry is having its slowest recovery in 30 years after last year's recession and terrorist attacks prompted companies to cut travel budgets. The delinquency rate for hotel loans is 5.2 percent, almost four times the rate for other types of real estate, according to Salomon Smith Barney.

"People don't want to lend money for the construction of hotels when we're not sure how things are going to be," said Mike McCarthy, who provides hotel loans as a director at the Bank of Nova Scotia. "Banks see hospitality construction lending as very risky, especially what happened since 9/11."

The supply of new rooms will rise 1.5 percent in 2003 and 2004. That's less than the 1.9 percent rate expected this year and the 2.8 percent added in 2001, Lodging Econometrics said.

The lack of new hotels will help the industry because lodging companies will have fewer rooms to fill when travelers return, the report said.

"When you have demand recovering and you have anemic supply growth, hotel companies will have more pricing power," said Troy Huff, an analyst for First American Funds, which manages $117 billion including shares of Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide Inc.

Marriott International Inc., the largest hotel company, controls 18 percent of the rooms under development, and Hilton Hotels Corp., the No. 3 lodging company, has 15 percent, the report said. Lenders prefer hotel projects backed by a well-known brand that will attract travelers, McCarthy said.