The U.S. hotel industry experienced a record-breaking year in 2014, as occupancy rose 3.6 percent, average daily rate (ADR) increased 4.6 percent, and revenue per available room (RevPAR) went up 8.3 percent, STR data shows. With an increase of 4.5 percent, demand again outpaced supply, which only rose 0.9 percent. Based on predictions shared by three industry analysts at the Americas Lodging Investment Summit, which drew more than 2,800 attendees to Los Angeles last week, this strong momentum and positive performance will carry over into 2015.
STR predicts continued room rate growth to drive RevPAR growth of 6.4 percent this year. Jan Freitag, vice president of global business development and marketing at STR, said a new occupancy record is within reach. “We’re at 64.4 percent now, and we’re going to hit 65 percent some time this year. That will obviously make this industry attractive to a lot more players but also give a lot more pricing pop.”
When broken down by chain scale, occupancy growth rates are strongest on the lower end of the spectrum. Meanwhile, luxury and upper upscale hotel experienced limited occupancy growth but had healthy room rate growth of 5+ percent. He attributed this slow occupancy growth to the fact that upper-end hotel chains are full, selling 7 out of 10 rooms every night for 12 months in a row, Freitag said. “On the lower end, having 50 percent of the rooms basically empty every night doesn’t bode well for pricing power.”
In terms of segmentation, growth in transient demand is slowing, but only because hotels are selling more transient rooms than ever before, Freitag said. ADR change in this segment is healthy to the tune of 5.5 to 6 percent. Group demand is back in full force, Freitag added, with more rooms sold than in 2008, while ADR percent change is basically flat. Revenue managers and GMs now have better visibility of what’s on the books and more pricing power, however, which means they will probably increase room rates going forward, he said.
As occupancies grow and room rates go up, STR expects more positive RevPAR growth. “We’re now 58 months into the cycle, we’re now better than pre-9/11, and we’re on track to have another 12 to 24 very positive months.”
Suzanne Mellen, senior managing director at HVS, said U.S. hotel transaction activity was robust in 2014. Total transaction volume increased by 22 percent compared to 2013, according to data from Real Capital Analytics (RCA). Despite strong RevPAR growth and net income gains in the industry, average price per key only increased 4 percent, she added. This was a result of select-service hotel sales dominating the market, while transaction activity of large, full-service hotels at high prices per key was more muted.
Transaction activity of hotels that sold for $10 million and above increased by 25 percent, driving the average price per key 20 percent higher than the peak achieved in 2006. On the lower end, the price per key of assets that sold for $2.5 million to $10 million remained well below the peak achieved in 2008.
Portfolio sales heavily contributed to sales volume increases in 2014. In terms of volume, portfolio activity rose 14 percent and the number of properties sold increased by 20 percent. Notable portfolio sales included Lone Star Funds’ purchase of 38 Hyatt House/Hyatt Place from Hyatt Hotels; NorthStar Realty Finance/Chatham’s purchase of 48 select-service properties from Inland American Real Estate Trust; NorthStar Realty Finance’s purchase of 40 Courtyard by Marriott properties from Sarofim Realty Advisors OBO Clarion; and Blackstone’s purchase of 48 Residence Inn/Homewood Suites from Clarion Partners.
Mellen reiterated that it’s a great time for the select-service segment. “Buyers see products that are homogeneous and can be managed very profitably and have low labor costs that weather well during downturns,” she explained. “And sellers are recognizing that these hotels have appreciated to either close to or well exceeding replacement cost.”
In terms of the hotel buyer composition, more international investors are coming to market, Mellen said. Cross-border capital represented 24 percent of capital flow into the industry in 2014, pushing out some of the institutional capital. Debt has been a major driver of sales activity. The CMBS market is increasing its share of the financing of hotel transactions, exceeding 50 percent in 2014, she said. This is at the expense of international and foreign banks, which can’t compete with terms offered by CMBS loaners.
While fundamentals remain favorable, Mark Woodworth, president of hospitality research at PKF Hospitality Research, said the high value of the U.S. dollar, the low price of oil, and low levels of inflation could have implications for hotels.
Although inbound tourism to the United States has hit record levels, international demand reacts negatively to the strong U.S. dollar, Woodworth explained. Imports to the United States become more affordable, while the price of U.S. manufactured goods and services goes up in foreign markets. “An increase in the value of the dollar therefore is a headwind against continued growth,” Woodworth said. That impact is felt in luxury, upper upscale, and upscale segments, primarily in key gateway cities.
The 58 percent decline over the past six months in the price of oil per barrel will result in economic winners and losers, Woodworth added. Moody’s Analytics predicts an average price of $70 per barrel for the entire year. Oil net-consuming nations like the United States reap the benefits of lower gas prices. “Low oil prices contribute to higher income and GDP levels, which in turn positively impacts demand for hotels,” he said. While the majority of U.S. markets fall into the winners category, energy-dependent states and cities are particularly vulnerable when oil prices decline.
Overall, PKF-HR remains bullish on year ahead. In 2015, the U.S. lodging industry will likely achieve a record occupancy level of 65.3 percent, Woodworth said. “Strong fundamentals are pervasive around the country and high occupancy levels in the vast majority of markets support aggressive pricing strategy, which will lead to another year of significant room rate increases for most and continued double-digit profit growth will be realized by the average U.S. hotel.”
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