Five years after the industry’s worst downturn on record, data shows hotels are nearly back to peak performance and metrics are expected to rise for the foreseeable future.
LOS ANGELES—Strip away all the ancillary influences that determine the success of the hotel industry—operating costs, guest satisfaction, distribution—and a pure look at performance data shows healthy growth and optimism in the U.S. until at least 2016.
At the opening session of the Americas Lodging Investment Summit in Los Angeles, a panel of data collectors pointed to evidence showing continued growth of demand and limited supply, which they said will finally bring the industry back to peak performance levels last experienced in 2007.
Randy Smith, co-founder and chairman of HotelNewsNow.com’s parent company STR, said revenue per available room in the Americas region has grown consistently for nearly two years, which can be considered a major milestone for the industry.
Smith said RevPAR growth can be attributed to the supply-demand imbalance. The industry in December set a record with 91.7 million roomnights sold, he said, and U.S. hotels are consistently selling more than 90 million roomnights per month. Meanwhile, supply growth remains muted.
“It’s really finally good to see demand growth exceed supply growth for a sustained, long period,” he said. “Really the only one other time we saw that was from 2005 to 2007. This is really nice.”
Another positive trend Smith noted was the fact that room rate growth is exceeding occupancy growth today. In 2010 and 2011, as the industry emerged from a downturn, RevPAR growth was primarily fueled by boosts in occupancy. About six months ago, Smith said, the growth shifted to rate “and now we’re back to equilibrium.”
Smith said the U.S. hotel industry’s peak average daily rate was $107 in 2007. After the sharp decline in 2008, STR predicted it would take six years to get average rate back to that level. The ADR in December was $106.10, Smith said, and he said he expects it to surpass $107 in mid-2013.
“It will probably take us five and a half years to get back,” he said.
Also Tuesday, STR unveiled its forecast for 2013 and 2014, showing healthy boosts in RevPAR of 5.7% this year and 6% for 2014.
While supply will grow incrementally in the near-term, Smith said he does not expect it to be an issue that would hamper revenue growth.
“We’re a little more optimistic this year about supply growth,” he said.
PKF Hospitality Research unveiled a similar forecast of RevPAR growth between 5% and 6% in 2013. Mark Woodworth, president of PKF, said his company’s forecasts continue to prove more accurate because the “industry is becoming more and more predictable.”
Woodworth said gross-domestic-product growth and consumer spending are the two biggest drivers of the current hotel recovery, and he expects the positive momentum to continue over the next few years.
“Limited supply continues to be an important part of the story,” he said.
So, what should the hotel industry be worried about? “Nothing,” Woodworth said. “Look at industry fundamentals: supply growth will be below average through at least 2016 and demand growth will be above historic averages through at least 2015.”
Woodworth said the fact that rate growth will drive RevPAR increases will ultimately lead to higher profitability for hotel owners.
He showed a graph that illustrated the industry’s peaks and valleys and said optimism will continue at least through 2014. The industry won’t reach its next inflection point until at least 2017, Woodworth said.
According to Jones Lang LaSalle, the U.S. hotel transaction volume is expected to increase 10% each year for the next five years.
“Investors see the industry as a relatively safe place to invest,” said Art Adler, CEO of Jones Lang LaSalle’s hotel and hospitality group.
Adler said hotel investors today are immune to short-terms obstacles—namely fiscal cliff issues—because performance continues to be so strong.
Adler offered a snapshot of the transactions climate in 2012. New York, he said, accounted for nearly one-third of all deal volume. The Grand Hyatt in Washington, D.C.—which was purchased by Host Hotels & Resorts for $442 million in July—was the largest single-asset transaction of the year. The $1.6-billion acquisition of the Motel 6 brand by Blackstone was the largest portfolio deal of the year.
Barring an influx of cheap and plentiful debt, the industry won’t again see deal volume skyrocket as it did in 2006 and 2007. In those years, capital was flocking to the hotel industry and underwriting was extremely loose, leading to “the greatest ramp-up in transactions the industry will ever see,” Adler said.
He said the pool of buyers for hotel assets has broadened in 2013. No longer are real estate investments trusts and private equity the only buyers; offshore buyers, high-net-worth individuals, pension funds and insurance companies, and owner-operators also are tossing their hats into the ring.
In 2012, Adler said, offshore buyers accounted for 8% of U.S. deal activity. While that may not seem like much, Adler said in the markets which they play—full-service, trophy assets in gateway cities—offshore investors are involved in the bidding process of nearly every deal that comes to market.
Another shift in the acquisitions market, Adler said, is the fact that more short-term traders are buying hotels as opposed to long-term holders of assets.
With the need to deleverage on the horizon, many real estate investors will be forced to bring properties to market, he said.
Commercial mortgage-backed securities loans “are coming due and something has to happen with those loans,” Adler said. “We think more properties will come to market.”