Hotel construction hits new high
By Kim Kennedy, Economics Editor

If you're looking for new opportunities for growth, given the sharp downturn in the housing market, look no further. The hotel industry experienced one of those "perfect storms" in 2006, allowing construction spending to grow at its fastest rate since 1995-96. The value of hotel construction spending rose an imposing 52 percent last year to $19.9 billion.

Unprecedented highs in occupancy rates and profits helped to boost construction spending for new projects. According to Smith Travel Research (STR), revenue per available room climbed 7.5 percent in 2006, after gains of 7.8 percent and 8.5 percent in 2004 and 2005. Hotel profits were even more inspiring. After reaching the record level of $22.5 billion in 2005, Smith Travel reports that hotel profits easily trumped this level in 2006 at $25.8 billion.

But act quickly to take advantage of this robust market. Hotel construction spending will continue to grow by a very healthy 25 percent in 2007 to $24.8 billion. Soon, however, slower job growth, decelerating consumer spending, rising interest rates, and spiraling hotel maintenance and overhead costs will begin to offset those stellar lodging fundamentals. Smith Travel Research is already predicting that room demand will rise just 1.7 percent in 2007 and revenue growth will decelerate to 5.5 percent. The market still has life, but it has already begun to turn.

Casino hotels drive industry growth

The 2006 surge in hotel construction was all about casino gambling. In Las Vegas alone, the $1.3 billion Palazzo, the $1.2 billion Encore at Wynn and the $1 billion MGM hotel at Project City Center all broke ground in 2006. Project City Center will contribute nearly 7 million square feet of new hotel space to the metro area. This massive project will offer a self-contained metropolis not just hotel amenities, but condos, casinos, shopping and entertainment everything and anything a lodging guest could desire.

Gaming hotels were on the rise in other parts of the country as well. In Atlantic City, Donald Trump began a second $125 million hotel tower at the Taj Mahal casino and Harrah's broke ground on a $142 million hotel expansion. In Detroit, three new casino/hotel projects broke ground in 2006: the $103 million Motor City expansion, the $195 million MGM Hotel and Casino, and the $100 million Greektown Casino and Hotel.

Action isn't over

And the action is by no means over. This year, several other high-profile projects are likely to break ground. In Las Vegas, Boyd Gaming's Echelon Place has razed the existing Stardust Hotel to make way for a $4 billion mega-resort that will include four separate hotels totaling 5,300 rooms. The main hotel, Echelon Tower, will have 3,300 rooms, a spa, a 4,000-seat theater and 25 restaurants and bars.

Similarly, Harrah Entertainment will break ground on a 1,017-room hotel tower at its flagship Caesar's Palace in Las Vegas. Harrah's also has plans to expand and renovate its Flamingo, Barbary Coast and Imperial Palace properties all in Las Vegas. Finally, the Mohegan Sun in Uncasville, Conn., will likely begin work on a $740 million expansion, which will include a 1,000-room hotel tower.

These projects and others like them will keep hotel construction spending on the rise in 2007 and will offer lots of high-end and high-profit opportunities for the furniture and fixtures industry.

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