Although still relatively few in number, luxury hotels have been opening at a record pace in recent times. With more new properties scheduled to open this year and next, supply is expected to outpace demand at an increasing rate over the next year or two.
“A decade or so ago luxury hotels were a very small segment of the market,” says Jonathan Basky, a hotel industry analyst with Market Metrix in San Francisco. “Well-to-do business and leisure travelers used them, but it was a small market. In the last decade, the number of affluent travelers really grew and so did the number of hotels to serve them. So now luxury hotels have a lot more competition in their own sector.”
According to figures from Lodging Econometrics, a Portsmouth, N.H.-based firm that tracks hotel development, 2008 saw the opening of 17 luxury properties in the U.S., a significant leap over previous years. By contrast, six luxury hotels opened in 2007 and eight opened during 2006.
Currently there are 26 additional luxury hotels in the pipeline, including 12 opening this year and another 12 opening in 2010.
“This represents very strong growth for the luxury segment, and at a time when demand has been declining,” says Patrick Ford, president of Lodging Econometrics. “So we’re looking at very challenging times ahead for luxury hotels, with 2009 more difficult than 2008. We see demand continuing to fall, and we don’t know when things will reach bottom or turn around.”
The 26 hotels scheduled to open have all broken ground and are in various stages of construction. Other luxury hotels that are in the planning stages are not likely to go forward—at least not in the near future, Ford says.
“Those hotels that have not yet been financed are unlikely to find financing,” he says. “Luxury hotels are in a very long timeline from the time they are planned and the time they open. It jumps through various real estate cycles. The developers may announce the project, but will either cancel it or sit on them until financing opens up. It can be a very long wait.”
John Keeling, a hotel industry analyst with PKF Consulting in Houston, agrees.
“If a hotel wasn’t financed or under construction by the third quarter of 2008, it’s not going forward,” he says. “Properties that are opening this year have been under construction for two years, which is how long it takes to build a luxury hotel. The bigger the project, the harder it is to get financing. The cost per room on a luxury hotel is very high, so what little financing is available is not going to luxury hotels.”
