by Elaine Sahlins, MAI, CRE, Managing Director, Valuation & Advisory
The hotel market continues to experience strong fundamentals and new supply. While some industry pundits are expressing concern about the new supply, demand growth continues to outpace supply.
In recent years, most new hotel projects fall into the Smith Travel Research (STR) chain scales defined for Upper Midscale, Upscale and Upper Upscale brands. As of December 2015, according to STR, there were 888,843 Upper Midscale rooms, 660,640 Upscale rooms, and 583,906 Upper Upscale rooms in the Pipeline. Average turn-key development costs per room average $150,000, $232,000 and $416,000, respectively. These average represent a wide range of locations and construction. Overall, the proposed rooms for these three STR chain-scales represent 42 percent of all the hotel rooms proposed in the U.S. The Upper Midscale and Upscale products represent almost 70 percent of the hotels under construction at the close of 2015.
We are full into a hotel construction cycle and are seeing hotel projects and construction costs continuing to escalate. The availability of skilled labor and competition with the development of other property types means higher costs for new projects.
Hotels, multi-unit residential and entertainment venues are anticipated to be some of the most active sectors of the construction industry in the next couple of years. Overall, at least 865 hotels with 103,230 rooms, are under construction and plan to open in 2016, according to STR. While the hotel industry is notoriously cyclical, with the expectations of strong occupancy and rate growth this year, the volume of new hotel development is being driven by its expected feasibility in many markets throughout the country.
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Elaine Sahlins, MAI, CRE is a Managing Director in the Hospitality & Gaming practice of Cushman & Wakefield where she provides appraisal and consulting services for hotels and casinos. With over 25 years of experience, Ms. Sahlins has performed valuations and market and feasibility studies of hotel and gaming properties throughout the United States relating to financing, feasibility and other real estate issues.