Sending a message that it is recovering and then some, the hotel sector's strength is now at Herculean levels. The top tiers are slightly less fertile for investment than the lower-priced chains but overall, the industry is having a golden moment.
"It's a good time to invest in the industry," says Robert Mandelbaum, director of research information services atPKF Consulting. "In fact, it's one of the better times."
"There's not a lot of new competition in 2013 and 2014, which will perpetuate the growth in occupancy," he continues. "That allows hotels to drive prices, and they are benefiting from the ADR."
Benefitting indeed. In a March report, PKF Hospitality Research predicts domestic hotels will experience a 6.1% increase in RevPAR for the year, prompting a staggering 10.2% rise of NOI.
An owner's first-hand experience supports these claims. "Since the start of the year we've seen fairly strong operating performance in all segments of hotels across our portfolio," says Tyler Henritze, a senior managing director in Blackstone's real estate group. "Q1 has met or exceeded expectations."
These positive forecasts, and first-hand experience, stem from astounding occupancy levels as well as a dearth of new supply, according to several industry analysts.
"We're seeing some of the most favorable operational metrics today than we have in a long time," says Gregory LaBerge, national director of Marcus & Millichap's national hospitality group, as previously reported in Real Estate Forum's sister publication, GlobeSt.com. Further, "This will go on for the next several years. Over the past few years, we've seen some of the lowest numbers of new hotels coming on line."
Supply was muted, LaBerge explains, but demand soared, with 2012 posting record room sales of nearly 1.1 billion nights. "And we're supposed to blow through that again this year."
Agrees Jan Freitag, SVP at Smith Travel Research, "In the first three months of this year, the industry made more room revenue, at $27 billion, than in any other first quarter." This positive moment will likely continue for some time, he adds.
"While the number of existing rooms-which is 1.8 billion-is higher than it's ever been, it's growing at a pace that's lower than its ever been," says Freitag.
Although it's not at levels that threaten current supply and demand dynamics, the pipeline is healthy. According to Lodging Econometrics, the total pipeline consists of 2,757 projects with 431,204 rooms. New York is the top market, with Washington DC and Houston following suit. From one management company's perspective, growth is happening at a good pace.
"Our pipeline looks fantastic," says Bill Fortier, SVP of Americas development at Hilton Worldwide. "We added more than 500 properties last year, we could add 600 this year and possibly 700 in 2014."
It's not a bad time for those looking to break into hotels to consider building, he suggests. "It's cheaper right now to build than to buy."
Still, the pace of growth in the market is far from a rapid clip, Freitag notes. "The long term average is 2.1% and we're at 0.6% for 2013. This is the lowest level of construction we've ever seen." The pace is lending an assist to pricing, he adds. The slow growth "means occupancy has to go up, and that gives you pricing power. For the first quarter, occupancy was 57.7% and ADR was $108." By contrast, according to PKF data, occupancy was 56.7% for Q1 2012, and ADR was $103.
But if an asset class is so popular, can a buyer get in? "That's the problem," admits Freitag. "We're expecting room rate and RevPAR growth in the next 24 to 36 months to be rate-growth driven and that'll drive NOI, which should then drive real estate values."
Players in the market and analysts alike feel the best bang for a buck in the hotel sector right now is limited- (also known as select- or focused-) service hotels.
"Focused service is the darling of the industry right now," declares Fortier. "Big private equity funds finally figured out that there's more to be made in focused service than full service," he asserts. "There's better long-term return and less risk because there aren't costs for food and beverage service and the like, which can be expensive to maintain."
There's plenty more… continue reading the complete article "Hotel Sector Mimics Hercules" on the Globe St website.
