Hotel construction boom leads to concern about glut


A nationwide hotel building boom has raised concerns about a glut of guest rooms in certain markets and slower revenue growth in the years ahead.

Construction began on nearly 149,000 hotel rooms last year - a level comparable to the industry building boom of the late 1980s. The current rate of building, which is far above historical levels, has contributed to a decline in occupancy rates and slower revenue growth only a few years after the industry staged a dramatic recovery.

The average occupancy rate dropped to 70.4 percent in 1999 from 71.5 percent in 1998, and from a peak of 72.7 percent in 1997, according to statistics from PKF Consulting.

"We've had more supply than demand," said Joseph V. Coccimiglio, a hotel-industry analyst at Prudential Securities.

Much of the construction - and potential for problems - is focused in the popular limited-service end of the hotel industry, which includes such chains as Fairfield Inn, Hampton Inn and Holiday Inn Express. This part of the market has more than doubled in size during the past decade and continues to add rooms at a rapid pace.

Industry giants Beverly Hills-based Hilton Hotels Corp. and rival Marriott International are in a race to open limited-service hotels. During the next two years, Hilton Hotels plans to open about 400 hotels - most of them franchised Hampton Inns - with a total of 60,000 rooms.

"Sure, you could say we are contributing to the supply," said Hilton Hotels spokesman Marc Grossman. But investors "got the money; they got land; they're going to build a hotel. We are going to do everything in our power to make sure that it's going to be one of our brands."

A notch above motels, limited-service hotels offer budget-minded travelers the comforts of a fully appointed guest room without the amenities found in more expensive hotels.

"Inside, the guest room is the equivalent of a [full-service] hotel room. Outside, it is more like a motel," said Bjorn Hanson, who heads the hospitality and leisure industry practice at PricewaterhouseCoopers.

The formula proved highly successful during the recession of the early 1990s, when travelers were eager to trade bellmen, room service and a hotel restaurant for a comfortable room priced well below $100 a night.

Limited-service properties emerged as industry darlings when the recession battered full-service, big city hotels.

Investors loved the concept because they could open a 100-room hotel on cheap land in an outlying location for as little as $5 million.

In contrast, a full-service property in a downtown location could easily cost $100 million or more.

As a result, the number of limited-service hotel properties ballooned to about 468,000 rooms during the past decade, according to PricewaterhouseCoopers.

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