United States 2009 Lodging Report

A Client Advisory on the Construction Pipeline & Forecast for New Hotel Openings

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. January 28, 2009

JANUARY 28, 2009

US Lodging Development Overview at Q4 2008

The US Construction Pipeline totaled 5,358 projects/686,516 rooms at the end of Q4. This rep-resents a 9% decline by projects and 13% by rooms from the cyclical peak in Q2 2008. The Pipeline is declining at an accelerated pace, having lost nearly 100,000 rooms over the past 2 quarters. This downward trend is expected to continue through 2010.

With the realization that the nation's economic and banking crises are going to be deep and prolonged, consumer and business sentiment has dampened considerably. Guestroom demand has turned negative, resulting in significant declines in occupancy and RevPar, and putting considerable pressure on room rates. This is causing many developers to retreat to the sidelines to await a bottoming in economic conditions and a thaw in the lending environment. As a result, project cancellations and postponements are at trend-line highs, while New Project Announcements are well below previous cyclical peaks.

New Openings in Q4 2008 exceeded expectations, with 367 hotels/43,845 guestrooms coming online, the highest quarterly total since Q2 1999. This brings 2008's total New Openings to 1,330 hotels/153,411 guestrooms, a gross growth rate of 3.2%. Of that total, new casino openings were 30 hotels/15,826 rooms, the highest count recorded since Q3 1998. New Construction projects are coming out of the Pipeline at an accelerating pace, as there is less pres-sure on the availability and cost of building materials and labor crews, leading developers to complete projects on schedule or even ahead of schedule.

Key Pipeline Metrics

Construction Starts in Q4 were down to 279 projects/29,180 rooms, their lowest level since Q1 2006. Project migration up the Pipeline towards Under Construction has essentially stalled due to the lack of available financ-ing. Loans are unavailable for larger projects and for those requiring a loan larger than $20 million. Smaller, less costly projects can be financed through local or regional banks, but lending conditions are strict and steep.

Cancellations of projects already in the Pipeline, 410 projects/66,481 rooms, are the highest LE has recorded. The greatest proportion of cancellations were for larger projects, casinos, and for nonbranded independent projects across all chain scales. These trends are ex-pected to continue until the economy improves and lending becomes more available.

New Project Announcements (NPAs) into the Pipeline are at 485 projects/56,345 rooms, significantly below the cyclical peak in Q1 2008. However, QoQ analysis shows a slight increase due to a rush by developers and franchise sales teams to finalize projects before the year's end. There continues to be a notable upswing in lifestyle branded projects, such as aloft, Edition, Indigo, Cambria Suites, and Hyatt Place.

LE's Forecast for New Hotel OpeningsNew Openings are expected to reach a cyclical high in the next two years, as projects that were able to secure financing before lending closed down come online. The speed with which Under Construction projects are moving to completion has ramped up now that logistical pressures have eased. As a result, LE has adjusted its Forecast higher, as it is now likely that New Openings will be greater than initially expected. LE's new Forecast for 2009 now calls for 1,431 hotels/165,927 rooms to open, a gross growth rate of 3.4%. In 2010, an additional 1,370 hotels/160,885 rooms will come online, a gross growth 3.2%. Net growth rates will end approximately +/- 0.2% lower after hotel closings and other removals from Current Supply are compiled. LE's Forecast for New Hotel Openings is based on current development trends as of the end of Q4 2008. The Forecast does not account for other unforeseen changes in economic or lodging operating fundamentals that would alter these trends going forward.