An ever-changing landscape keeps the hotel industry on its toes said data trackers and corporate leaders during the ALIS Summer Update.
Editor's note: This article was originally posted on 11 July 2012. This article was chosen as part of Hotel News Now's look back at 10 years of the hotel industry.
GRAPEVINE, Texas—Try as they might, industry data trackers and executives are finding it more difficult to remain positive about the recovery process for the U.S. hotel industry. If Monday’s Americas Lodging Investment Summit Summer Update serves as an indicator, strong demand fundamentals will only carry hotels so far.
Panelists throughout the four-hour event regularly pointed to demand figures as a reason to stay optimistic; however, there was a clear indication that everything is not rosy for an industry searching for reasons to raise its overall average daily rates.
“The economy is at near stall speed, and just like an airplane, that’s a risky place to be,” said Aran Ryan, director of hospitality and leisure for PricewaterhouseCoopers.
“It’s an L-shaped recovery, if recovery is the right word,” said Michael Murphy, EVP for First Fidelity Companies. “There’s a lot of trepidation in the air.”
But there is reason for optimism, various speakers said.
“Long term, lodging is gaining wallet share and consumers have demonstrated the importance of travel in their lifestyle,” Ryan said.
Tom Corcoran, chairman of FelCor Lodging Trust, pointed to the 27 consecutive months of RevPAR growth as an indicator of the industry’s health.
“It reminds me of the ‘90s,” he said, adding that it’s a slow recovery rather than a “hockey-stick” rebound.
“I think we should rejoice,” he said. “There’s a lot of damn good news out there.”
Naveen Kakarla, president and CEO of Hersha Hospitality, said the discussion during this recovery is about market share shift versus market growth—and the outlook window is fairly short.
“More and more investors, whether you’re long-term or short-term in how you underwrite, more people are looking at a quarter-to-quarter basis in terms of the economy,” he said. “You don’t know what next year’s going to be like relative to what kind of curve it’s going to be.”
Amanda Hite, president of STR (the parent company of HotelNewsNow.com), said the news is still good but warned that year-over-year comparisons will get more difficult in the second half of the year because of the industry’s strong performance in the final six months of 2011.
The STR president reported that a record 430 million roomnights were sold during the first five months of 2012, but there is concern that the increase in rates is occurring at about half as fast as the decrease in rates that occurred during the recession.
“The scenario that we’re watching is, ‘Will rates continue to have strong increases or will they hover where they currently are?’” Hite said. “If there is any concern for us it’s that the rates might not be as strong as we would expect with the level of demand increases.”
Back to the peak in nine short years
Mark Woodworth, president of PKF Hospitality Research, painted a picture that indicated there’s still a few years to go before nominal ADR returns to its previous peak level. He cited the 1990-19991 recession that took rates six years and three quarters to rebound from a $5.40 decrease, and the 2001 downturn that took rates six years to rebound from a $9.40 drop. PKF’s algorithms indicate that it will take nine years for ADR to recover from the $10.90 drop that occurred during the first quarter of 2008.
“It won’t be until the end of 2016 that we see room rates recover in real terms,” he said.
Ryan said the news is better for RevPAR.
“I’ve been thinking of it as a six-year detour,” he said. “2013 is the year we recover nominal RevPAR to 2007 levels.”
The latest potential speed bump for the industry is the possible recalculation of government per-diem rates by the General Services Administration.
“Uncertainty is the wild card for 2012,” Woodworth said, adding that demand will start to waver during the third quarter. “Per diem is a big unknown that could be very consequential to our industry.”
However, Woodworth said the close correlation between GDP growth and the demand for hotel rooms indicates that 2013 should be better than 2012 because “consumer and business spending has continued to power ahead very attractively.”
Woodworth said the strong growth at the higher end of chain-scale segment will continue until 2013 when the stronger performances will shift to the middle segments.
PKF forecasts nationwide occupancy to be 61% in 2012 and 61.9% in 2013; ADR will increase 4.1% in 2012 and 4.7% in 2013; and RevPAR will rise 5.8% in 2012 and 6.6% in 2013.
Hite said each of the chain-scale segments is “starting to close the gap and get closer to prior peak levels.”
Nearly all of the presenters said a muted supply pipeline—Hite said there are about 60,000 rooms under construction in the U.S.—will ultimately be a savior for the industry.
“The lack of supply (growth) is going to help drive compression and help recover on the rate side,” said Russ Urban, senior VP of acquisition and development for HEI Hotels & Resorts. “I don’t think group business is coming back, at least in our portfolio and many other portfolios. That’s going to hurt compression.”
Mike Deitemeyer, president of Omni Hotels & Resorts, said group rates are lagging but his company is starting to see some upward movement there.
The news is positive for hotel valuations as U.S. hotel values during 2013 will surpass the peak values established in 2006, according to Stephen Rushmore, Jr., the newly named president and CEO of Hospitality Valuation Services.
He projected seven consecutive years of hotel valuation increases through 2016.
Rushmore said markets that are good candidates for hotels to be sold in now include San Francisco, Boston and Washington. “We’re anticipating weaker (net operating income) growth in these markets the next few years,” he said. Meanwhile, markets to sell assets in during 2013 include New Orleans, Atlanta, Chicago, Philadelphia and Cleveland.
Rushmore said more transactions and refinancings will take place during the second half of 2012.