The pipeline of new hotel projects gained momentum in 2006. By the end of 2006,
several hotel companies and development firms announced record growth in new hotel
construction. PriceWaterhouseCooper and Torto Wheaton report that roundly 136,500
new rooms began construction in 2006; the largest year over year increase (64.2%) since
1994. Reed Construction Data (RCD) reported that the value of new lodging starts
averaged $1 billion a month in 2006. According to RCD, hotel construction spending
expanded faster than all other building markets in 2006. Motivated by strong hotel
operating fundamentals and abundant private equity and financing, hotel investment
and new hotel projects were the darlings of the 2006 real estate industry.

Development costs continued to increase through 2006. Last year, the cost of many
critical building materials such as copper, cement, steel, and wallboard climbed at
above‐inflationary rates, while the cost of lumber moderated. According to the bureau of
labor statistics, materials and components for construction increased at an overall rate of
6.7% and construction machinery and equipment grew at a 4.2% percent rate. Lumber
and wood products, however, declined by roundly 5.0%. According to Engineering
News Report, gypsum products increased 18.8%. Higher fuel prices affected both
material production and transportation costs. Higher transportation costs affected FF&E costs as well. Many developers reported less concern over price escalations of materials,
than the growing cost resulting from a scarcity of skilled labor.

Even as housing construction retrenched, a shortage of skilled construction labor
continued to contribute to higher costs. In 2006, areas with robust commercial construction
projects and public works projects in areas such as Las Vegas, Phoenix, Southern California,
and elsewhere, experienced difficulty in managing labor costs. A dearth of skilled construction
workers resulted in signing bonuses, housing concessions, and relocation expenses
which impacted construction costs.

The price of favorable sites appreciated in 2006 as desirable hotel sites proved to be
attractive for other types of improvements. In suburban and less densely areas, land
prices for advantageous hotel sites rose as sellers were often pursued by more than one
buyer. Retail developers frequently outbid hotel developers for well-located sites. In
urban areas, mixed‐use projects continued to be the most viable option for feasible hotel
development with residential sales subsidizing the hotel construction.

New brands, in-fill sites, mixed‐use projects, hotel condominiums, and redevelopment of
existing obsolete improvements provided ample opportunities for new lodging development.
Years of low supply growth, a strong economy and the accelerating rebound of hotel
rates and occupancies coalesced in a peak of new hotel construction.

In 2005 and 2006, investment requirements and savvy sellers resulted in hotel transactions
with record low capitalization rates. As the cost of purchasing existing hotel product
increased, new hotel development, even with ever accelerating construction costs, began
to look more and more attractive. With fewer existing properties with acceptable
investment returns available for buyers, hotel construction was viewed with greater
interest by hotel investors. New hotel brands also provided platforms for hotel investors
to expand in strong markets. The number of new hotel construction projects proliferated
despite the concurrent rise in construction costs. In 2006, the high cost of new hotel
development did not discourage developers flush with record low-cost capital.