Will Developers Spoil the Hotel Party?

There's an old saw in commercial real estate that grizzled veterans love to repeat: “Why do developers develop? It's because they can.” Every boom and bust cycle begins with a construction spike, which leads to over-supply, followed by falling occupancies and dwindling profits. The great news for hotel investors, not necessarily developers, is that there doesn't appear to be a building boom on the horizon anytime soon because construction costs are soaring and existing assets are still priced below replacement cost.

Atlanta — the nation's fourth-largest hotel market with an inventory of 92,000 rooms — serves as a microcosm of the bigger hotel picture. The annual growth rate for new supply in the Atlanta market has historically averaged 3.4%, but the forecast calls for only a 0.1% increase this year, according to PKF Hospitality Research. The forecast for 2007 is much the same (see table).

With room demand outstripping supply, revenue per available room is expected to surge by 12.1% this year and moderate to 4.6% in 2007. “Because of the challenges to new construction, this high level of performance that we're at today will persist for a much longer period of time than historically has been the case,” says Mark Woodworth, senior vice president with PKF Consulting. “We're not going to see the rate of new supply in Atlanta return to the long-term average level [of 3.4%] until 2009.”

There are signs that the pre-development pipeline is beginning to fill up. In mid-August, plans were unveiled for a new 48-story Hilton in Buckhead that will include 300 rooms topped by 192 condos, and slated to open in 2009. Sandcastle Resorts & Hotels will develop the hotel while condo developer Wood Partners will develop the residential portion. Not to be outdone, Ackerman & Co. has unveiled plans for a three-phase development in Buckhead that would include 498 luxury condos, 300 hotel rooms and 12,500 sq. ft. of retail space.

Atlanta's hotel investment climate hasn't always been so rosy. In the 1990s, the market often led the nation in supply growth, much of it fueled by the 1996 Summer Olympics. That construction wave and a growing perception that Atlanta wasn't a premiere downtown destination for convention groups took its toll for a decade on the market's occupancy rate.

But that could be about to change. A new aquarium is drawing big crowds to downtown, a new World of Coca-Cola will open in the summer of 2007 and the city will host the NCAA Men's Final Four in March 2007. “The stronger the downtown market is, the better the entire lodging market performs,” says Woodworth.

Let's just hope developers exercise some restraint.

IS THE ATLANTA HOTEL SECTOR PEAKING?

Growth in RevPar and average daily rate in the nation's fourth largest hotel market is expected to moderate in 2007.