In 2017/18, the national lodging market continued to climb to new heights: In 2017, hotels in the United States operated at the highest occupancy and average rates ever recorded, with additional growth across both metrics in the 2018 year-to-date period.

Hotel development activity correlates directly with the ebbs and flows of hotel-sector performance. As the market continued to reach a new peak for the current development cycle in 2017, developers pursued hotel construction and redevelopment at a pace not seen since 2006 and 2007, and the pipeline of new hotel projects gained momentum.

HVS has tracked hotel development costs for the last three decades, collecting data from actual hotel cost budgets during our assignments. This year’s sample reflects the largest sample HVS has analyzed given the number of hotels in the pipeline, as well as our growing presence in 40 U.S. markets.

This 2017/18 survey reports per-room hotel development costs based on data compiled by HVS from hotel projects proposed or under construction during the 2017 calendar year. With the availability of more data, we elected to add a redevelopment category to account for projects that did not include ground-up construction, such as those that involved a complete renovation, conversion, or adaptive reuse. Thus, our data now reflect ten product categories: budget/economy, limited-service, midscale extended-stay, upscale extended-stay, dual-branded, select-service, full-service, lifestyle/soft-branded, redevelopment, and luxury hotels.

The HVS Hotel Development Cost Survey sets forth averages of development costs in each defined lodging product category. The survey is not meant to be a comparative tool to calculate changes from year-to-year, but rather, it reflects the cost of building hotels across the United States in 2017. As will be discussed, the averages set forth in this survey are greatly affected by the types and locations of hotels being developed at this point in the development cycle.

Our goal in sharing this publication is to provide a basis for developers, investors, consultants, and other market participants in evaluating hotel development projects. Given that development costs for hotels are dependent on a multitude of factors unique to each development and location, this report should not be relied upon to determine the cost for actual hotel projects or for valuation purposes, but rather, it is intended to provide support for preliminary or actual cost estimates, as well as to show a comparison across the various categories.

Supply and Demand Dynamics Allowing for Increased Hotel Development

Without a doubt, 2017 served as another banner year for hotel occupancies and average rate (ADR). STR reported national year-end 2017 occupancy and ADR at 65.9% and $126.72, respectively, with both metrics increasing to 67.7% and $130.37 in the year-to-date period through September; this reflects a 0.5% and 2.5% increase in occupancy and ADR, respectively, when compared to same year-to-date period in 2017.

Except for a few markets, such as Chicago, Minneapolis, and Orlando, where RevPAR levels were negatively affected by an increase in supply that exceeded demand, most U.S. markets experienced the exact opposite in 2017. Demand levels across the country generally exceeded increases in supply, which, coupled with rising ADRs, resulted in higher RevPAR levels across the country, as illustrated below.

EXHIBIT 1: U.S. Occupancy, Average Rate, and RevPAR

Source: STR

A deeper look at the supply-and-demand picture across the nation helps to explain the rise in these metrics. While the number of rooms available in the U.S. increased by 6.5% from 2010 through 2017, or an average of 0.9% annually, overall rooms sold grew by approximately 22%, or an average of 2.8% annually, during the same period, resulting in the rising occupancy and ADR levels that the nation is now experiencing and that is ultimately translating into higher RevPARs.

EXHIBIT 2: U.S. Supply and Demand

Source: STR

Following these eight years of consecutive growth since 2009, analysts agree that we are likely to be reaching the top of the cycle in terms of hotel occupancy. It is these record RevPAR levels that have continued to prompt new hotel development, as the likelihood for the feasibility of a project resulting from increasing revenue and NOI levels is now, more than ever, viable. In 2008 and 2009, new supply entered the market in excess of 2.0% of the prior year’s available supply, as many projects that opened during that time had started construction in late 2007 or early 2008.

However, the pace of growth in new supply slowed substantially to an annual average of 0.6% from 2011 through 2015. Yet, as previously shown, accelerating occupancy and ADR dynamics, coupled with the availability of favorable financing, once again increased that pace to 1.5% and 1.8% in 2016 and 2017, respectively, as illustrated below.

EXHIBIT 3: U.S. Change In Supply and Demand

Source: STR

The 1.8% increase in supply in 2017 represented approximately 90,000 new hotel rooms, and the pace of new supply growth continued to accelerate in 2018. According to the American Hotel & Lodging Association (AHLA), as of year-end 2017, 189,000 new hotel rooms were under construction across the country, representing an imminent supply increase of 3.7%.

In October 2018, despite the opening of approximately 100,000 hotel rooms over the prior twelve months (a 2.0% increase over the prior year), the number of hotel rooms under construction remained relatively unchanged at 190,000, as proposed hotels moved from the planning phase to the construction phase, further illustrating that the pace of hotel development and new supply growth continues its momentum.

In 2017 and 2018, the markets with the highest supply growth included Dallas, Denver, Nashville, NYC, and Seattle. These markets reported new supply increases over 4.0%, more than double the national average.

EXHIBIT 4: Historical and Proposed New Supply

Source: STR, AHLA

Although 190,000 rooms are currently under construction, with an additional 206,000 in the planning phase, these 396,000 rooms will not all enter the market at the same time, but rather over the course of two to four years, as each project completes the development process over the course of time.

Furthermore, the rapid increase in construction costs will cause developers to delay some projects indefinitely, or cancel them altogether, as competition for construction labor and materials among various product types, such as commercial, residential, and public works, continues to increase. Nevertheless, assuming most of these projects do enter the market during the next four years, this would represent an average annual supply increase of nearly 100,000 rooms, in line with supply increases over the last two years.

While the feasibility of hotel development in some markets may have been previously hindered by stringent financing, high land costs, lower RevPAR levels, or the lack of available brands, these factors have been largely offset by improving dynamics within each of these factors, which is reflected in the increasing numbers of projects under construction or in the planning phase.

As an example, while typical loan-to-costs ratios for new hotel development remain near 60% (relatively low when compared to 2006 and 2007), new financing vehicles such as PACE financing or the USDA’s Business & Industry Guaranteed Loan Program have created the possibility for higher leverage for some projects that fit these programs’ requirements. Additionally, options for development have continued to expand as many new brands, some affiliated with the most dominant companies, continue to gain momentum and acceptance with lending institutions.

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