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Even More Room at the Inn

Though it may seem counterintuitive at a time when many hotels around the country are having trouble filling their rooms, nearly 100 hotels are scheduled to open in major American cities this year.

New York will have the most new hotels, 46, according to Smith Travel Research, a hotel research company in Hendersonville, Tenn., followed by Houston, with 30. New hotels are opening as well in Atlanta, Boston, Chicago, Dallas, Los Angeles, Miami and Washington. That does not include new hotels opening in the suburbs of these cities.

Hotel room keycard on table
Altrendo Travel | Getty Images
Hotel room keycard on table

So how can so many hotels be opening even though the economy and travel remain so slow?

The answer, according to Mark Lomanno, president of Smith Travel Research, is that “hotel building cycles rarely mesh just right with economic cycles.” Planning a new hotel can take two to four years, and construction an additional one to four years. Most of the hotels getting ready to open were on the drawing boards several years ago, when the economy was healthy, demand for rooms was strong and room rates were rising quickly.

And once construction is under way, said Sean Hennessey, chief executive of Lodging Advisors, a New York consulting company, there really is no better alternative than to finish.

“Once you put the foundation in the ground and start with construction, from an investment point of view, it almost always makes the most sense to proceed, even if market demand appears shaky,” he said, “because a completed and operating hotel can generate some revenue to defray development costs.”

For the time being, all the new hotels will add to what was already a buyer’s market. Travel experts agreed that business and leisure travelers could generally expect a broader choice of rooms at better prices than a couple of years ago.

The lodging markets in New York and Houston were particularly ripe several years ago for hotel growth. In New York, occupancy levels were 85 percent from 2004 through 2008, and the average daily room rate rose 86 percent in those years, said Bjorn Hanson, a clinical associate professor at the Tisch Center for Hospitality, Tourism and Sports Management at New York University. Developers, he said, believed that these conditions “created a safe, secure investment environment.”

As a result, this year’s hotel expansion is the largest in New York, Mr. Hanson said. The new hotels represent most of the major chains, according to Smith Travel Research. Marriott , for instance, will open five hotels in the city under the Courtyard and Fairfield Inn brands, it said. InterContinental will open four hotels, including a 592-room InterContinental in Times Square, and others under the Holiday Inn Express and Staybridge Suites brands; and Hyatt will open four hotels, two under the Andaz brand and two under the Hyatt Place brand, Smith Travel Research said.

Starwood says it is opening six hotels under the Sheraton, Four Points by Sheraton, Aloft, W and Element brands. InterContinental declined to comment on its plans, and Hyatt would not confirm the Hyatt Place openings.

Houston’s new hotels have different roots. Demand from thriving energy companies was a big factor, Mr. Lomanno said.

“What compounded the issue,” he added, “was people relocating to Houston after Hurricane Katrina and staying in hotels. It made occupancy rates unusually high and made the hotel market as an investment more attractive.”

According to Smith Travel Research, Marriott will open eight new hotels in Houston this year, under the Marriott, Courtyard, Fairfield Inn, Residence Inn and Springhill Suites brands, while InterContinental will open 14 hotels, under the Candlewood Suites, Holiday Inn, Holiday Inn Express and Staybridge Suites brands.

With hotel capacity in New York expected to rise more than 12 percent this year, Mr. Hanson predicted that consumers would be the immediate beneficiaries. “In general, new hotels will use discounting to try to gain initial market share,” he said. “This will last a long time, because there is no imminent occupancy recovery. And existing hotels will face increased price competition from new hotels, which will require additional discounting.”

Mr. Hennessey, of Lodging Advisors, said he expected that discounting would also occur in Houston.

Projections for recovery of the American hotel industry as a whole in 2010 vary greatly. Mr. Lomanno said the industry “reached the bottom of the cycle a few months ago.” He said he expected occupancies to “slightly improve nationally by midyear, and the decline in rates should stop no later than the end of the year.”

Although he said New York tended to be the “room rate leader as we come out of a recession, maybe that won’t be the case this time around.”

David Katz, lodging analyst for Oppenheimer & Company, estimated that revenue for each available hotel room in the United States would drop 5 percent from last year and that occupancies would be flat.

But Steven Kent, lodging analyst for Goldman Sachs, predicted that “corporate and leisure travel will outpace the broader economy” this year, and revenue for each available room at all North American hotels would rise 4 to 5 percent, with occupancy increases responsible for most of that gain.

Not surprisingly, hotel company executives are bullish. Tony Capuano, executive vice president of global development for Marriott, predicted that its two new hotels in Los Angeles, an 878-room J. W. Marriott opening next month and a 123-room Ritz-Carlton opening in March, would stimulate “a meaningful volume of group demand” downtown.

Steve Haggerty, global head of real estate and development for Hyatt, said: “New York’s ability to find equilibrium is always going to be quite strong. It will never be permanently overbuilt. Pricing power will come back. Right now, the question is when.”

Hyatt, which manages the Grand Hyatt on 42nd Street in Manhattan, opened a 253-room Andaz at 75 Wall Street last week and will open a second, 184-room Andaz on Fifth Avenue and 41st Street in June.

But the current buyer’s market will not last, Mr. Lomanno said, because not a lot of new hotel rooms will be added from 2011 to 2013. That will mean “more rapid acceleration” of room rates, he said.

“There’s short-term benefit for travelers,” he said, “but not in the medium to long term.”