U.S. Hotel Construction Surges to Record High in 2023

In 2023, the U.S. hotel industry thrived, led by Dallas with 193 new hotels. Meanwhile, MSCI data showed financial challenges in commercial real estate.

Jordan B.
January 29, 2024

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Good morning. The U.S. hotel sector was booming in 2023, especially in Dallas, with a national record of 193 hotels and 22,291 rooms under construction. Plus, new data from MSCI highlights both visible and hidden financial strains in commercial real estate distress.

Today’s issue is brought to you by Viking Capital.

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HOT hospitality

U.S. Hotel Construction Surges to Record High

In 2023, the U.S. hotel industry checked in on a high note with an unprecedented 5,964 projects entering the construction pipeline and adding nearly 694,000 new rooms, per Lodging Econometrics’ latest report.

By the numbers: The Southern U.S. is witnessing the bulk of this expansion, driven by anticipated Federal Reserve interest rate cuts. This optimism in the sector is evident as over 21,000 new rooms across 260 projects were added in Q4 alone – a 9% jump from the previous year.

Leading the way: Dallas broke records with 193 projects and 22,291 rooms, showcasing its booming hospitality sector growth. Atlanta was not far behind, setting its own record with 151 projects and 18,730 rooms. Other cities like Nashville and Phoenix also showed strong growth, with Nashville announcing 123 projects (16,148 rooms) and Phoenix 122 projects (15,977 rooms). The Inland Empire contributed with 116 projects and 11,649 rooms.

Zoom in: Upper-midscale and luxury categories led the pack, comprising 62% of the national hotel construction pipeline. Additionally, the year witnessed a record in hotel renovations and brand conversions, with over 2,000 projects affecting 303,330 rooms.

Looking ahead: Dallas is set to spearhead U.S. hotel development, with 2,259 projects slated to start in the next year. In 2024, the spotlight turns to New York City (28 projects/3,050 rooms), Dallas (18 projects/2,333 rooms), Phoenix (17 projects/3,070 rooms), Atlanta (15 projects/2,808 rooms), and the Inland Empire (15 projects/1,559 rooms). In 2025, the Inland Empire is expected to lead with 22 projects encompassing 2,074 rooms.

➥ THE TAKEAWAY

What to watch: The U.S. is gearing up for 2,259 new hotel projects in the next year, fueled by potential 2024 interest rate cuts. This is expected to attract significant investment in new builds and renovations, particularly in luxury hotels. JLL predicts a global hotel investment surge of 15-25%, with tech-savvy tourist cities likely drawing the most foreign capital.

✍️ Editor’s Picks

Guilty: Suburban Chicago construction company owner Alex Nitchoff admits to bribing a Cook County Assessor’s Office employee for favorable property assessments.
Expansion: Disney is planning a $1.9B immersive theme park near Disneyland, with over $100M for Anaheim infrastructure and $30M for affordable housing.
Wage dispute: NYC Comptroller sued BLDG Management for allegedly underpaying workers by $32M, seeking $40M in total penalties.
Financing: Terra and Grass River secure $245M from JPMorgan Chase for Grove Central, a mixed-use development in Miami’s Coconut Grove.
Cashing in: One St. Louis CRE firm grew local deals 227% last year, cashing in on Clayton’s newest tower, outpacing peers’ 11% average decline.
Housing shortage: Despite external factors like rising costs and labor shortages, local strategies can effectively tackle housing deficits. Here are five.

🏘️ MULTIFAMILY

AI-driven: Pagewood, leveraging machine learning for real estate, acquires Houston’s 152-unit Costa Mesa apartments.
Lending uptick: MBA forecasts a 29% increase in CRE and multifamily lending in 2024, signaling a positive shift for the sector.
Rental burden: Harvard report reveals half of renters in 2022 faced a cost burden, allocating over 30% of income to rent and utilities.
Sale: Chicago apartment building near future Bally’s casino sells at a 26% loss, highlighting 2023’s tough commercial property market.

🏭 Industrial

High yield: If you’re interested in investing in industrial REITs, here are two you could buy today yielding over 3%.
Huge funding: Capstar Real Estate Advisors secures funding for a major warehouse project, boosting Mesquite’s industrial space near U.S. Highway 80.
Buying spree: Alterra Property Group expands in Charlotte with a $3.5M purchase of an industrial outdoor storage site following an August acquisition.

🏬 RETAIL

Transformation: Lexington Partners is turning Westbrook Outlets into a $425 million mixed-use hub, aiming for a town center vibe.
Reprieve: Following community and city pushback, Safeway agrees to keep its Fillmore District store open until early 2025 amidst sale uproar.

🏢 OFFICE

Crisis loading: The D.C. office market faces an unprecedented existential crisis, with experts predicting increased sales at significant losses.
AI future: Artificial intelligence companies are transforming both technology algorithms and the office real estate market.
Conversions: Global office leasing dips 6% year-over-year, 24% below pre-pandemic levels, spurring conversions to housing and hotels.

RING THE ALARM

Commercial Real Estate Distress Levels in 2023: A Closer Look

The current state of distress in commercial real estate raises a key question: how widespread is it? Some properties are visibly struggling, while others quietly face challenges or are on the verge of distress.

Actual vs potential distress: MSCI’s US distress tracker report sheds light on the situation, differentiating between actual and potential distress. Actual distress, which includes bankruptcy and significant tenant issues, reached nearly $85.8 billion by the end of 2023. This distress spanned various sectors: $35.5 billion in offices, $21.6 billion in retail, and notable amounts in hotels, apartments, industrial spaces, and others.

Geographic trends: The breakdown of this distress is geographically diverse. The Mid-Atlantic region saw $10.3 billion, the Midwest $13.4 billion, the Northeast a significant $26.9 billion, the Southeast $8.6 billion, the Southwest $9.2 billion, and the West led with $16.7 billion. This spread illustrates how the impact of distress varies across regions, with no area left untouched.

The hidden iceberg: However, the more alarming figure lies in the potential distress, valued at an enormous $234.6 billion, nearly three times the amount of actual distress. This category is more complex, including assets that are financially deteriorating but haven’t yet reached the point of explicit distress. The largest share of potential distress comes from the apartment sector, which accounts for $67.3 billion. This figure is particularly concerning for recent buyers who invested at peak prices only to find their assets under increased scrutiny due to overly optimistic financial assumptions.

➥ THE TAKEAWAY

What happens next? The commercial real estate market is navigating choppy waters, with a visible iceberg of $85.8 billion in sight and an even larger, unseen threat of $234.6 billion in potential distress. The scenario sets the stage for a volatile next 12 months. Borrowers will be forced to either hand back the keys or secure rescue capital and rework loans. Companies like Blackstone, Brookfield, and RXR are betting on the latter, eyeing the chance to snap up trophy properties at reduced prices in the coming year.

CHART OF THE DAY

After experiencing its slowest year in over a decade for commercial property sales in 2023, the Philadelphia area is entering the new year with a sense of cautious optimism. While property sales are expected to be lukewarm in the early months, there are positive signs pointing to a potential market recovery, buoyed by improving market sentiment and stabilizing interest rates.