Transient business pushes hotelier confidence
Transient business pushes hotelier confidence
06 SEPTEMBER 2013 8:10 AM

ADR and RevPAR will rise in 2014 as the industry prepares to enjoy the next 18 months, according to panelists at the Hotel Data Conference.

NASHVILLE, Tennessee—The global hotel industry is sitting relatively pretty for the next 18 months, buoyed by transient business that is lifting overall performance in the face of diminished group business and cutbacks to government spend, according to panelists during the “Final gun: Are we ready for the post-season?” closing general session at the 5th annual Hotel Data Conference, hosted by STR and Hotel News Now.

There isn’t much that could derail recovery—at least not during the next 18-month window, according to Warren Marr, managing director of PricewaterhouseCooper’s hospitality and leisure practice.

He said the economy and demand both would be strong, “although there are mixed signals in the pipeline.”

Mark Woodworth, president of PKF Hospitality Research, said the pace of demand growth in lower-priced segments was less robust than in the upscale and luxury segments. “Driving heads in beds in these lower-priced sectors will become increasingly important,” he said.

Meanwhile, the focus at the higher end of the market remains on pushing rate, Woodworth added.

“Business investment spending is rising in equipment and software, and companies are becoming marginally more confident about taking risks, but decision making in the next year or so will be different,” he said. “Business leaders are not as spooked, and managers of upscale hotels will push rates.”

Woodworth also predicted that increased net operating income would lead to a lower risk premium.

“We see in Q4 2013 that net operating income will rise by 9.9%, rising to 13.2% in 2014, a year that will see some strong transaction activity,” he said.

Amanda Hite, president and COO of STR, parent company of HNN, shared her forecast as well.

Supply will grow 0.8% during 2013, followed by a 1.1% increase during 2014, she said. Average daily rate will increase 4.3% this year and 4.6% next year. And revenue per available room will rise 5.7% by year end and 6% during 2014.

Confidence misplaced?
Driving ADR remained the panelists’ top concern.

Other possible concerns Marr mentioned were the occurrence of unpredictable demand shocks, oil prices returning to pre-Arab Spring levels and increases in interest rates and credit availability, all of which could create pressure on travel spend and infrastructure investment—and thus ADR growth.

“Post-recession lodging demand has expanded at a much faster clip than the economy,” Marr said. “The figure for average daily rooms sold is up 8% since Q1 2009, while in the same period (gross domestic product) has grown by only 5%. Hotel construction activity is still far below prior recoveries—by only 1% in 2013, compared with 1.9% in 1995—even though the demand-supply balance is the most favorable it has been since 2004-2005.”

Hite’s list of her top five concerns included:

  • ADR recovery;
  • declines in group business;
  • an accelerating pipeline during the next 18 months;
  • the U.S. hotel industry trailing Europe and a drop in demand from the BRIC nations of Brazil, Russia, India and China; and
  • the source of future demand.

“In two to three years, supply growth will outpace demand, so what will happen at that point?” Hite asked. “The next goal of hotels has to be to create demand, rather than just steal current demand from others.”

The hotelier’s view
As the only hotelier on the panel, Mit Shah of Noble Investment Group agreed that ADR was a top concern.

“We’re frustrated by not being able to drive rates,” he said. “Service quality remains the same, but prices have not. We’re long-term bulls, and we have to pay attention to what higher interest rates will do. Overall, our growth is all in our transient-focused hotels, and I believe that RevPAR should be the area most to focus on, but I would ask what is any RevPAR and ADR growth going to be costing us, and via which channels will this come from, when there is a channel cost on top of a franchise fee on top of commission on top of other costs.”

Managing those costs and finding the best distribution mix is another key area of focus, Shah said.

“Part of our immediate focus is to understand the distribution channels of the future and where the transient market will be most loyal,” he added. “These transient travelers are here. They are here to stay, and they are big, so we must ask what will be the distribution channels that they come from. Who will the customer be loyal to? In the next five years, we’ll concentrate on picking the best brands that are most able to hold on to that loyal customer.”

The group traveler, however, has been somewhat more difficult to come by, Shah said.

“We are dealing with the realities of a serious group demand situation, which is here to stay. We can argue this lack of demand constitutes a half-day less of booking, or less (food and beverage), but structurally for our business, we have to pay attention to this group drop,” he said.

Speaking on development, Shah said investors are shifting their expansion strategies.

“If you talk to the largest global real-estate firms, they were a few years ago truly, utterly infatuated with BRICs, but today they have turned their appetite off just as quickly,” he said. “Unless you are from Brazil, it is impossible to get things done in Brazil, and the same thing goes for India. Money is going into Europe, and keep an eye on Mexico.”

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