By Roland Murphy for AZBEX
The second half of 2023 saw a slew of articles and market reports noting the post-pandemic travel boom was finally starting to slow. There’s no denying the COVID lockdowns generated a desire in the consumer populace to make up for lost time and missed opportunities. There was also a ratcheting up of the collective sense of mortality that pushed FOMO levels into the red.
Of course that initial burst had to die down. Whether it’s tulip bulbs or subdivisions, no bubble lasts forever. Everything normalizes over time. It’s interesting to note, however, how strong demand levels have remained even after the surge started to fade. People appear less inclined to put off travel and associated activities.
When a previously unknown and uncontemplated circumstance can come out of nowhere and disrupt your life for months (or worse), taking that trip to sunny Phoenix you’ve always planned can ratchet up from “someday” to “next Sunday” with understandable urgency. When leisure travelers start to get a taste of that whole work-life balance thing, it can remain a priority. Perhaps it’s one situation in which the “new normal” isn’t just a cliché but may actually reflect a legitimate change in markets and perception.
Obviously, airline and hotel room bookings saw and maintained that early uptick and long wave crest, and they continue to enjoy strong performance even in the face of multi-decade high inflation and costs of goods and services increases that have now been with us long enough to class as buttes rather than spikes.
The construction market had its own set of problems that lingered long after the lockdowns, and we won’t revisit in detail the horrors of supply chain disruptions, capital cost explosions and other difficulties that every outlet, including this one, has already covered extensively. If you’ve been in the industry for more than six months, you know.
Hotel Construction Boom
From the construction side of things, the industry is continuing to reap the fruits of that initial explosion that airlines and existing hotels were able to harvest as soon as the lockdowns ended and hysteria started fading.
If you remember back to 2020, several pundits were wringing their hands over whether or not the pandemic would spell a permanent shift in, or potential end for, the hotel industry as we knew it. During COVID, fears about density, proximity and sanitation/sterilization were top of mind, and how well could closely set hotel rooms possibly accommodate and manage those worries? Would every new lodging booking be for short-term rentals while hotels suffered the same vacancies and abandonment rates as Class B and C office space?
Obviously not. While countless hotel development projects were quickly put on hold or canceled outright because of pandemic disruptions, the segment has rebounded in ways and to an extent only the bravest visionaries would have dared say out loud three years ago.
Construction and development are not nimble processes. For maneuverability, they more closely resemble ore freighters than speed boats, with long, slow turning radii and cumbersome procedures to get up to speed. Understanding the process in those terms, it’s easy to see why 2023 was such a hot year for hotel construction, following the push that began around the start of 2021.
Lodging Econometrics reported earlier this month that the year-end 2023 U.S. hotel construction pipeline set a new record, coming in at 5,964 projects totaling 693,963 rooms. In Q4, the pipeline added 240 projects/21,287 rooms to the previous quarter’s total, resulting in a 9% year-over-year increase by projects and a 7% increase by rooms.
Even with the comparatively healthy market in the years immediately preceding the pandemic, we have to look all the way back to 2008 to find the previous peak year, when hotel development reported 5,883 projects in the pipeline.
Phoenix is a National Hotel Construction Leader
With outstanding weather for more than half the year, widely varied amenities and convenient proximity to other attractive destinations, metro Phoenix has been a popular tourist destination for decades. The area’s explosion in employment opportunities and diversification in the types of jobs available due to a boom in corporate relocations has also fueled business travel beyond the previous business conference and convention appeal.
A separate Lodging and Econometrics report from last week puts Phoenix in fourth place nationally for hotel construction pipeline projects, showing a count of 122 projects and 15,977 rooms. Dallas led the nation with 193/22,291, followed by Atlanta and, perhaps surprisingly to some, Nashville.
The DATABEX project database was launched in 2016 and tracks Arizona development projects with valuations greater than $5M. Taking a look at the DATABEX figures, we see that even with the pandemic plummet, Arizona overall and metro Phoenix in particular have always maintained a comparatively healthy appetite for construction in the hotels/resorts/casinos hospitality category.
If we factor out master-planned projects and focus solely on individual developments, DATABEX shows 290 projects entered into the category over the last eight years.
Since project IDs are entered sequentially, it is fairly easy to look through the project list and find projects that had initial submittals in late Q4 2020 and early Q1 2021 to mark the first real resumption of activity. We see that slightly more than 100 of the 290 lodging hospitality projects in Arizona have been input in the last three years. That speaks volumes about the market’s appetite for products.
While we filter out master plans for the purposes of project consideration, there is an asterisk worth noting in this instance. In addition to the 290 individual projects on the list, there were 86 master plans filtered out that had lodging hospitality components as part of their project scope. For comparison, DATABEX has a total of 306 master plans across the entirety of project types, including public works, industrial, healthcare and all other formats. More than a quarter of master-planned developments in Arizona since 2016 include a hotel or hotel-related development, showing their obvious value as an anchor component for large-scale development.
Looking at the chart of DATABEX projects broken down by status, we see a fairly close comparison with the Lodging and Econometrics data. While their report does not list definitions or methodology, their Phoenix pipeline count shows 122 projects for metro Phoenix.
The DATABEX count totals 290 projects across the state, with 197 located in Maricopa County—a safe enough equivalency to metro Phoenix for a quick comparison. Of those 197, 29 have been canceled and 85 have been completed, yielding a DATABEX pipeline of 83 projects. Again, we don’t know how the outside report sets its criteria for project inclusion, market area or status, so we cannot nail down a line item comparison.
In the recent BEX 2024 Construction Activity Forecast event, DATABEX Manager Lya Parrish delved into the hotel and hospitality markets and reiterated the surprising rebound in the industry. According to our analysis, Phoenix is third in the U.S. for rooms under construction and projects are “mostly smaller branded hotels, with several large boutique hotels in the works.”
Across the entirety of the Hospitality market, 2023 saw a construction volume of more than $1.08B, and we expect 2024 to see an increase to $1.24B, or nearly 15% year-over-year.
For the remainder of 2024, our data indicates large boutique, high status projects will continue to move forward, while smaller, limited service chain hotel developments will retain their popularity, thus ensuring significant market activity on both ends of the market spectrum.
