Depending on who you talk to, the hotel industry is in amazing shape; or is still struggling. Boy is that confusing! Truthfully though, both camps are correct. This business is so extremely multifaceted that getting all areas of the business firing on all cylinders is rarified air, and quite possibly a hint that the peak is coming.
But have no fear there are no peaks here. Instead the hotel industry is continuing to gather strength as the business moves through the upward swing of the cycle. So like the Facts of Life we have to take the good and take the bad.
On the good side the industry is pushing rates and wringing more profits out of hotels than during the past few years. The bad? Financing for new construction is still elusive to many and the deal market is still lagging. That’s creating a bifurcated business and shows why the bulls and bears are both right in a sense.
At this weeks’ NYU Hospitality Investment Conference both sides of the argument were in full force as the optimists and pessimists both looked at the numbers to prove their point.
Take the recent numbers from STR for the United States for 2011 and through April of this year. RevPAR has been soaring with an 8.6 percent gain in 2011 and a 7.5 percent gain so far in 2012. ADR was up 3.3 percent last year and 4.2 percent this year while occupancy rose 5.2 percent in 2011 and has inched up another 3.1 percent through April. Demand has continued to soar with a 5.8 percent increase in 2011 and 3.4 percent this year while new hotel supply has remained extremely low with 0.6 percent increase last year and a 0.3 percent increase this year.
Additionally, room rates are approaching peak numbers and not including some crazy unforeseen event it looks like all the benchmarks you want to see rise will continue to do so as the supply/demand equation remains firmly in the hotel owner’s favor. Those are the kind of numbers that make operators very happy since guests will be paying more for rooms.
“We hope we are in the midst of a very strong rebound,” said Randy Smith, Chairman and Founder, STR. “This has been a remarkable rebound.”
Smith said though room supply is the one number that is surely to always rise it is growing at a “very modest” rate demand continues to rise for rooms. “Room supply increases constantly every day, week, every month and we are attempting to sell a record number of hotel rooms every day. The constant ongoing challenge is to sell more and more rooms in a steadily growing market.”
He added prior to down the industry was selling about 85 million hotel rooms per month before that number drifted down. Now the industry is selling more than that consistently. In March 90 million room nights were sold every day, a new record, said Smith.
STR is forecasting for 2012 supply will grow 0.5 percent, demand will rise 2 percent, occupancy will rise 1.5 percent, ADR will increase 4.0 percent and RevPAR will increase 5.5 percent.
But the deal side of the business is still problematic, say experts like Brian Quinn, EVP Development at Driftwood Hospitality Management.
“It’s a challenging environment for several reasons. Right now there is a lot of equity and capital sitting on the side but there is also a lot of competition for deals. Additionally there are strict underwriting requirements because the appetite for risk is low,” said Quinn.
The competition for deals is so high because many properties expected to come to market never did. For all the discussions about how the myriad properties currently in default would come to market that scenario never materialized. Turns out lenders taking the “extend and pretend” attitude toward loan defaults is starting to pay off. Valuations are roaring back so now people are waiting for what may me a higher return if they sell later.
According to HVS hotels on average sold for $99,000 per key at the height of the hotel real estate market in 2006 before dropping to a low of $56,000 in 2009. In 2010 pricing moved up 17 percent and another 20 percent in 2011 to $78,000 per key. Now HVS predicting hotels could go up to $92,000 per key in 2012 and $108,000 in 2013. By 2015 that number could be $124,000. So it’s no surprise owners and bankers feel if they wait a little longer they’ll reap rewards
Mark Elliott, Senior Managing Director, Hodges Ward Elliott said the second half of 2012 will see more deals. “It will be more robust which was more robust than the second half 2011. It is not the lack of capital, but a lack of opportunities which has been held back as owner optimism has grown. They are waiting and may get more of a price. There is a little bit of hold mentality as the recovery moves forward,” said Elliott.
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