New Hotel Constructions – Up against a wall

A record performance in 2005 and optimistic projections through 2008 augurs well for new hotel projects. Hotel constructions have hit an all-time high since its previous peak in 2000. However…

The ‘scarcity’ of rooms (vs. demand) was triggered in part by the trend to convert valuable hotel property into condos and condotels. CNN Money reports that some $900 million worth of hotel properties representing 3,380 hotel room units, underwent at least partial conversion in 2005. Is there really an “undersupplied market’’?

Construction costs are rising at an alarming rate (12% annually). Add the cost of land and the long development timeline and it’s easy to see why many hotel projects will sink halfway through. It’s a challenging proposition to make a new hotel profitable even in a booming market.

Total hotel operating costs, excluding labor and utility, increased about 7% in 2005 (PKF Consulting), more than twice the pace of inflation. Energy costs have been projected to increase by 12.5% for this year while the pace of revenue growth in US hotels in major cities is expected to slow. In NYC, average daily room rates have not kept pace with inflation.

While profits are up, they are barely at the industry’s peak in 2000. Are the indicators strong enough to offset the looming white elephant in the room – energy, labor and construction costs? Can revenue growth sustain the same pace over the next few years?

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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