Ever since the COVID-19 lockdowns jammed up real estate construction, hotels have been battling to maintain their pipelines. Now with the threat of another recession looming they are fighting a different battle.
Central banks across the world are raising interest rates to try to curb inflation. This means the cost of debt is increasing, making it harder for some to finance deals.
Having sold off most of their property assets, the big hotel brand holding companies are at the mercy of investors and developers to maintain their net unit growth.
The question for the likes of Marriott, Hilton and IHG is: do they need to up their incentives to keep things ticking over in such a challenging macroeconomic environment?
For Marriott, the answer is no, at least not yet.
Still growing
At the end of the third quarter, Marriott’s worldwide development pipeline totalled 3,024 properties with more than 502,000 rooms, including 1,039 properties with approximately 204,800 rooms under construction.
This is the twentieth straight quarter where the firm had more than 200,000 rooms under construction globally.
However, speaking on an earnings call after the release of the latest set of results, CEO Tony Capuano did say that things were now taking just that little bit longer.
“We continue to see strong franchise application volume in most markets around the world. The constriction we're seeing in the debt markets for new construction, particularly here in the US, is lengthening the cycle even a bit longer in terms of getting shovels in the ground. But we're quite encouraged about the consistency we've seen in the volume of under‐construction projects in our pipeline,” he said.
Capuano added that fallout from the pipeline was below historical averages.
“As has always been the case in constricted debt markets, brand affiliation, track record of the developer, strength of the sponsorship are what ‐‐ are the factors that capture the construction debt that is, in fact, available,” he said.
Interestingly, Marriott doesn’t have the urge to get more involved on the financial side of things, especially, you’d imagine, because it is happy with how the pipeline is currently looking.
“[We] are not seeing that we are increasing our financing support or investment support in a meaningful way for deals. I think at the end of the day, the first mortgage loans that projects are looking for do not typically come from Marriott and that has not changed. In terms of debt service guarantees, operating profit guarantees and key money, I would say we continue to see them in the same kind of frequency and proportion as we've seen in the past,” chief financial officer Leeny Oberg said on the same call.
No slowing down
According ot its most recent Global Construction Pipeline Trend Report, released at the end of August, Lodging Econometrics projects scheduled to start construction in the next 12 months, were up 1% to 3,664 projects with rooms unchanged at 525,096, while projects in early planning reached record-high project and room counts of 4,379 projects/657,861 rooms, up 22% by projects and 13% by rooms YOY.
The US accounts for 37% of projects in the total global construction pipeline while China has 26%, meaning that 63% of all global projects are concentrated in these two countries.
Way back in third place is India with 339 projects/42,548 rooms, followed by the UK with 309 projects/46,296 rooms, and Indonesia with 284 projects/45,359 rooms.