February 27, 2008

Atlas Hospitality Group reports that economics are driving U.S. hotel building boom

IRVINE, CALIF.

Hotel construction took off in California in 2007 despite the turmoil in the credit markets and concerns about a changing economy, according to a new report from Atlas Hospitality Group. Alan X. Reay, president of the Irvine-based consulting and brokerage firm, told real estate Web site GlobeSt.com that the industry expansion — a 24% year-to-year increase in the number of hotel rooms under construction and a 74% increase in the number of rooms opened — is maintaining its momentum thus far this year.

The Atlas study shows that the number of hotel rooms under construction climbed to 16,495 versus 13,341, and the number of rooms opened i n 2007 soared to 5,668 in 2007, compared with 3,265 in 2006.

“What’s driving the new construction is, purely and simply, economics,” Reay told GlobeSt.com. He says that prices for existing hotels have reached the level that developers would rather build than buy. “It’s making more sense to buy land and build today than it is to buy product that is 20 to 30 years old for US$100,000-plus per room,” Reay explains.

The turmoil in the capital markets hasn’t slowed construction because financing is available to build hotels and those who are building and financing them see a bright long-range future for the hotel industry in California, according to Reay.

“Despite all of the talk about recession, everyone that we’ve spoken to who has the capacity to develop is gearing up to do a lot more,” Reay says. He explains that financing is readily available because the funding for hotel construction generally comes from local banks that offer construction loans tied to the prime rate — which has been decreasing lately.

Lenders are willing to finance construction because the California hotel market continues to perform well. Reay adds that hotel developers have benefited from the slowing in the residential market because labor and materials costs have dropped as a result of the near-hiatus in residential building.

DCN News Services

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