Why US starts are stalled, renovations/conversions riding high

At the same time, renovation/conversion activity in the U.S. has hit the highest totals ever recorded by LE, with 1,100 projects and 146,757 rooms at the end of the third quarter. The active pipeline includes 1912 projects and 258,568 rooms (which is also a peak number for LE).

Bruce Ford

Hotel Investment Today talked to Bruce Ford, senior vice president and director of global business development for Lodging Econometrics, about the numbers and why renovation/conversion activity will continue to be a big piece of the overall construction pipeline.

Hotel Investment Today: What’s the state of the new construction pipeline in the U.S. right now?

Bruce Ford: We have a pipeline that’s under construction, but it’s been going slow over the past 18 months as a result of financing conditions, inflation conditions, and overall shortfalls in funding to get the projects done… In the past six to nine months, there has been a shortfall in starts because financing costs have gone up so dramatically. So, as a result, we have a pipeline that will open up throughout 2024 and 2025. But we don’t have a clear path for when it will start new construction projects again. Because, as of right now, starts are not at historical lows, but they’re pretty darn close.

But we also have a lot of projects coming in because the brands are out there signing projects, announcing new brands, and signing new construction projects, with the hope that when the financing window opens again, these projects will begin.

HIT: Your data shows that projects in the early planning stages are just shy of a record high. What’s the status of those kind of projects?

BF: A project listed in the early planning stages on the report wouldn’t start construction until at least the fourth quarter of 2024. And probably more likely 2025… People are signing the agreements, and the brands are allowing them to keep the agreement in place for multiple years, which would never have been the case in a pre-pandemic time.

HIT: What’s the story on the renovations and conversion side?

Nine out of 10 conversions is a significant renovation… [The renovation and conversion pipeline] is running at historic highs in the United States, and that is also beginning to sweep across the rest of the world. The reason for that is, as a franchise company, you can sign a hotel to convert to a brand, and that can be in the [new] reservation system 90 to 120 days later in some cases, with a renovation that trails that conversion. So, in many cases, the conversions are a way to get more properties hooked up to the franchise companies faster. And therefore, that is a great focus for them right now… The conversion and renovation activity will likely continue to be a big story in the overall development pipeline.

HIT: You mentioned the renovation cycle beginning to sweep across the rest of the world. Can you talk about where that’s happening?

BF: When we go across other regions of the world, they are somewhere trailing the trends in the United States… Europe is just really entering the renovation cycle right now. The Middle East is entering the renovation cycle. Asia is probably still a couple of quarters away from entering the renovation cycle because they have a lot of new construction projects that are still opening…

When you look at the China market, it has more rooms under construction than almost the rest of the world. The reason is that many projects just stopped during the pandemic because China was closed… But that has changed, and so many of those are back on a path to completion. That would never have happened anywhere else in the world because hotels that were under construction like that wouldn’t just stop.