The rapid development of destination hotels, largely in Nevada, California and Florida, has driven the exceptionally strong hotel building boom in 2004 through 2008. The boom is beginning to slow, but hotels will remain the fastest growing commercial construction market. Construction activity is already declining for non-destination hotels and will slow in 2008 for destination hotels. Many long-time-ahead luxury trip plans have likely already been cancelled in a weak economy. And international visits will be restrained by the turnabout of the U.S. dollar to appreciation later this year.

Hotels to Remain Fastest Growing Commercial Market

Hotels will remain the fastest growing commercial construction market even as overall hotel construction spending progressively declines from a 66% annual growth rate at the end of 2007 to an expected 31% in 2008 and 12% in 2009. Hotel room rentals are more optional than most purchases for both business and consumer buyers and hence are extremely sensitive to changes in income, confidence and price.

Already domestic income growth has slowed and confidence has dropped to recession levels. The hotel vacancy rate has risen slightly and room rate growth has dropped sharply from the 6%-to-7% annual rate early in 2007. Furthermore, booming room rentals to foreign visitors will ease ahead with world economic growth declining from very high to average-plus. Also, the U.S. dollar is expected to begin rising later this year.

Destination Hotels are in a Class by Themselves
Hotel work is the only commercial sub-sector that is expanding quicker and more strongly in the 2004 to 2008 building boom than in the last building boom from 1993 to 2000. Construction spending for hotels jumped nearly four-fold in the last four years compared to a 350% rise over the seven years ending in 2000.

The extra strength came entirely from the development of destination hotels. These are the expensive casinos and resorts that are the travelers' destination, rather than simply being a hotel convenient to another destination. The balance of the hotel market has had a smaller expansion in 2004 through 2008 than in 1993 through 2000. This includes highway, airport and downtown hotels and motels.

The Two Different Markets are Apparent in Starts Statistics
The dichotomy between destination and other hotels is very clear in the value of construction starts. Hotel starts in Nevada, California and Florida made up 37% of total U.S. hotel starts in 2007 and increased 107% versus 2006, while starts in all other states combined dropped 11.1%. Starts increased 246% in Florida, 118% in Nevada and 46% in California. Over $500 million in starts in California in January 2008 was solely responsible for the large jump in national hotel starts after three subpar months.

Problems Supplying Related Infrastructure
The volume of projects in the planning stage suggests that the boom in destination hotels in not yet over. However, is likely to slow since California, Florida and Nevada are the three states hardest hit by the housing collapse and its spillover into the local economy. Each of these states will be struggling to fund the infrastructure necessary for more destination hotels. In Las Vegas, airport and road congestion is already a major annoyance for visitors. Neither Nevada nor Washington has the funds to fix this before the scheduled opening of additional large casino hotels.