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Sternlicht: High Construction Costs May Limit Number of New Hotels

Barry Sternlicht, chairman and CEO of Starwood Capital, told CNBC’s “Morning Call” that high construction costs may limit the number of new hotels built in the immediate future.

“It’s very expensive to build right now,” Sternlicht said. “Steel prices, all commodity prices, copper – even asphalt because of its oil component – (are high) and that means there’s not a lot of new construction in most markets. Some markets, like the hotel market, there are record numbers of new hotels in the pipeline. But it remains to be seen if these hotels will be built because when you put pencil to paper and see how much they cost, a lot of them don’t make economic sense.”

He said office construction remains strong in New York where hedge funds have largely replaced dot-coms as hot tenants. New York’s vacancy rate is 3% or 4%, but some cities in the Midwest have vacancy rates of 15% to 20%, limiting demand for new construction.

“I think people are looking at absorption of space in the major office markets and assuming its going to continue and maybe accelerate,” Sternlicht said. “I think some of us feel there will be a deceleration of economic activity.”