Why a Falling Construction Pipeline Is Positive for US Hotels
The hotel construction pipeline tells potential investors about the development activity in the hotel sector and points to future trends in supply.
Hotels are classified into chain scale segments based on the ADRs charged by each hotel. Most hotel chains operate in one or two segments. Estimating the growth of each segment will help investors to identify faster-growing companies.
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Chain scale segments
According to STR’s Global US Construction Pipeline Report in May 2017, rooms under contract totaled 580,000 spread across 4,806 hotel properties in the month, a 13.8% rise year-over-year (or YoY). This rise was aided by under-construction room growth of 16.4% YoY to 192,000 rooms spread across 1,477 hotel projects.
Apart from rooms that are under construction, rooms under contract include projects in the final planning stages, but they don’t include unconfirmed projects.
According to STR’s April 2017 report, the upper midscale and midscale segments accounted for the highest percentage of rooms under contract. The upper midscale segment made up 33% of rooms, clocking a rise of 12.4% YoY to a total of 193,000 rooms. The upscale segment made up 28% of rooms, clocking a rise of 161,000 rooms.
The economy segment clocked the highest rise of 124.6% YoY to 11,000 rooms under contract—just 2% of total rooms. The next-highest growth of 79% YoY was clocked by the midscale segment, which formed 10% of total rooms at 56,000.
The luxury segment, which forms 2% of rooms under contract, recorded the lowest rise of 10.1% to 13,000 rooms.
Hotel pipeline on a sequential fall
According to STR data, the number of rooms under construction has been falling sequentially since February 2017, meaning a slower rise in supply. Given the moderation of demand expected going forward in 2017, this could be good news for the US hotel industry.
You can gain exposure to the hotel industry by investing in the First Trust Consumer Discretionary AlphaDEX ETF (FXD), which invests ~14.8% in the hotel, restaurants, and leisure sector. It holds 0.58% in Wyndham Worldwide (WYN), 0.87% in Hyatt Hotels (H), 0.90% in Hilton Worldwide Holdings (HLT), and 1.2% in Marriott International (MAR).