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Thursday, July 31, 2008

The Coming Hotel Bust

by Calculated Risk on 7/31/2008 12:17:00 PM

From Abha Bhattari and Fred Bernstein at the NY Times: Terrible Timing for a Hotel Boom

A record number of hotels are opening this year, and the timing could not be worse.
Until recently, the industry was in the midst of a major boom, and it was during those good times that the hotel companies made plans to build many of the new rooms. ... Nationwide, hotel occupancy levels have been hovering around 65 percent, down about 5 percentage points from last year, according to Smith Travel Research.
The industry now has about 6,000 new hotels, with nearly 800,000 rooms, under development, a 27 percent increase from last year, according to Lodging Econometrics ...
Back in May I relayed a conversation I had with well known hospitality attorney Jim Butler. At that time it was clear that financing for hotels was becoming significantly tighter (see earlier post for his comments). For anyone interested, Jim writes a blog on hotel legal issues: Hotel Law Blog

I also posted this graph comparing investments in lodging vs investments in other non-residential structures:

Non-Residential Investment vs. Lodging Click on graph for larger image in new window.

This graph shows the strong growth in lodging in recent years (from the BEA supplemental tables). I'll have an update soon for Q2.

Clearly lodging investment has been in a quite a boom (as the NY Times story noted). But occupancy vacancy rates are already declining, and more inventory is coming online, suggesting there will be quite a bust in hotel investment.

Lodging is one of the three key components of non-residential investment that I expect to decline sharply. The other two are office buildings and multimerchandise shopping (malls!).