There may not be a better time than right now to own and operate a hotel. That’s according to three industry analysts we asked to explain what’s driving lodging’s blockbuster year.
SCOTT BERMAN
U.S. Hospitality and Leisure Practice Leader, PricewaterhouseCoopers
WHAT HAPPENED TO THE LODGING INDUSTRY LAST YEAR? If we rewind the clock 12 months, our forecasts would have illustrated that the industry was moving along at about a 6 percent RevPAR growth and this would continue through 2014. Group business was still lagging, there was still choppiness in some of the key markets like Washington, D.C., the secondary and tertiary markets were re-bounding but not robust. If you look at it now, I would say the industry completely missed the boat. That 6 percent forecast became an 8 percent RevPAR growth last year.
And that is largely due to the intensity and robustness of the group segment, the top commercial markets performing better than expected, and the heart of the country doing much better. And supply continues to be muted in all of the chain scales except right in the middle. So it’s really a good news story that the industry has done much better than the pundits expected.
SO DID THE INDUSTRY MISS THE BOAT IN RAISING RATES THIS YEAR? Growth came from both room rate and demand, which was surprising. The rate piece is what we got right, but it’s the demand piece that made the difference. With groups now signing contracts, 2015 should be the year of real rate growth and the burden is on the operators to do what they are contracted to do.
Of course, growth will change from market to market, but the good news for operators is that having the group bill back gives them more leverage because they have less inventory, and that road warrior piece that core corporate business needs those room blocks.
WERE THERE PARTICULAR MARKETS THAT SURPRISED YOU WITH HOW THEY PERFORMED LAST YEAR? Clearly those markets that had major convention facilities have been beneficiaries of group business. So Orlando, Philadelphia, and San Diego have all done better than expected. The easy answer is to say New York City because of its significant supply growth, but Miami is the biggest surprise for me. Given what hotels there are trading at and their ability to induce demand and grow rates, it’s almost the perfect story. And it’s fueling investment into South Beach and the whole regeneration of the downtown market. Miami is in the top five in room rate. That has historically never occurred.
ANY OTHER SURPRISES? Yes, the rebirth of resorts. In a healthy economy with stronger group penetration and the need by the operators for resort inventory to fulfill customer redemptions, there is all of a sudden a shortage of resort inventory. Obviously, markets like Miami, Orlando, California, and Hawaii are beneficiaries as are the Caribbean and Mexico. It was only three years ago that resorts were the absolute least favored mar-ket segment by owners and operators. Now resorts are being renovated and restored. A good example is what Playa and Hyatt are doing with the 13 resorts that will be branded by Hyatt and operated by Playa. Within the next two years there will be a couple thou-sand rooms of resort inventory and a new brand promoting an inclusive product. Inclusive is not new, but it is new to being part of a U.S. brand portfolio. It’s really a code for packaging—essentially a cruise ship on land.
LOOKING AHEAD, WHEN DO YOU SEE NEW SUPPLY BECOMING A CONCERN? Based on past cycles, there’s no question that competition is the Achilles of this business. I wouldn’t say it’s a concern yet, but we’re starting to see 3 to 5 percent supply growth in some places. That’s usually the key indicator that growth could impact those markets. Still, in a strong economy we haven’t seen much fallout from new supply. The one market where you do see rate pressure is New York City, where rates are growing at 3 or 4 per-cent not 6 or 7. So you really have to look at it market by market. You can’t make generic statements about the whole country.
I will say that the coastal markets, from Boston down to Miami, Seattle down to San Diego, continue to be important in terms of capturing both leisure and corporate business from inbound travelers—Asia to the Pacific, Europe and the Middle East to the East Coast. As the brands expand their footprints overseas, they’ll capture more inbound business from travelers familiar with North American brands.
HOW WILL LOW GAS PRICES IMPACT THE LODGING INDUSTRY THIS YEAR? We have not analyzed anything, so my comment is strictly intuitive. But if we look at other cycles as leading indicators, lower fuel prices help lodging overall and have historically benefited select service and economy properties more than others because, psychologically, people want to travel and drive more when they have more money. We certainly know that when fuel prices have risen, these types of proper-ties have been the most impacted negatively.
MARK WOODWORTH
President , PKF Hospitality Research
WHAT HAPPENED IN 2014? A year ago, we were measurably more optimistic than anybody else with respect to what was going to happen. We thought the net supply change last year would be a 1.2 percent, and it looks like it’s going to be more like a 0.9 percent. One of my takes on this change is that new development is coming back at a slower pace than what the underlying industry fundamentals would suggest. Conversely, the level of demand growth this year was higher than we had forecast, and the return of the customer is now happening at a faster rate than the underlying fundamentals would suggest the level growth to be.
HOW DOES THIS FACTOR INTO THIS YEAR’S FORECAST? What’s interesting is how average daily rate grew exactly at the rate we had expected it to grow last year. Having rate catch up to where we thought it should be is an important indicator of where we are in the cycle. It reinforces the notion that the fundamentals are extremely solid, and there’s nothing that we see out there that causes us any concerns through 2017. It’s going to be a very robust protracted period of good times for virtually all U.S. lodging industry participants.
WHAT’S DRIVING YOUR REVPAR FORECAST FOR THIS YEAR? In the early part of the recovery, we saw demand being driven by increases in corporate profits and increases in real personal income levels, both of which manifested in a quicker recovery for upper priced hotels. Now with job growth finally kicking in— four months of plus 200,000 jobs being created—and being sustained, we’re seeing lower priced properties really beginning to drive occupancy and increase rates.
And while prices have gone up a lot on a relative basis, they’re still very attractive. The year-end national ADR for 2014 is $115.62. If you look at these rate levels relative to what they were before the great recession six years ago, it’s not that much. The pre-recession peak was $107.40 in 2008, and it’s only up 7.6 percent since then. That’s a nominal price in real terms.
ARE THE PROJECTIONS EQUALLY ROSY ACROSS ALL U.S. MARKETS? No, but another benefit of rising employment is that it’s no longer just the gateway cities or tech centers that are growing; we’re starting to see it more in the Mid-west and secondary markets. Now we’re seeing high employment cities that aren’t falling into the high demand growth mar-kets. Austin is a good example of this. The reason demand has not grown as much in a high employment market like Austin is occupancy levels are so high that the hotels are basically full. It’s another way of looking at the industry and understand-ing that the strength of the fundamentals is very positive not only at the national level but also in many of the key markets around the country.
WHAT IS THIS YEAR LOOKING LIKE? The RevPAR growth we’re forecasting is pretty close across all chain scales. The higher priced ones are largely generating this growth from room rate, whereas the lower priced segments will be closer to a 50/50 mix of occupancy growth and ADR growth. If we’re right in our forecast, then it’s going to be good for all but really, really good for luxury, upper-upscale, and upscale properties.
HOW MIGHT LOW OIL PRICES IMPACT HOTEL MARKETS NEXT YEAR? There is no doubt in our minds that a low oil price environment is positive for most markets, though we know from past cycles that the low prices have to sustain themselves for some time before consumers begin to actually change their behavior.
But markets where oil related industry is a meaningful part of their GDP are going to feel it. We think it’s going to be mitigated to a meaningful degree because of the economic diversity of traditional energy markets. If you look at what drives the economies in places like Houston or Dallas today versus what we saw 30 years ago, these areas are much less dependent on energy production. But if I’m in northern and western Pennsylvania, or if I’m in the Dakotas, then yeah, I’m not feeling too good right now.
JAN FRIETAG
Senior VP, Strategic Development, STR
LAST YEAR, WERE THERE ANY MARKETS THAT SURPRISED YOU PERFORMANCE-WISE? We track 162 markets across the United States and what’s interesting to note is that for the 10-month year-to-date RevPAR percent change, only one market was negative. Rochester had a 1.7 percent drop in RevPAR. I can assume that the area is experiencing a continued flight of industries. But otherwise I was pleasantly surprised by all the positive RevPAR growth.
WHAT DO YOU THINK IS DRIVING THAT? It had to do with the demand increase from business and leisure transients as well as from groups. The transient side, interestingly, never went away during the great recession. Yes, we sold a few more transient rooms, but overall that stayed fairly healthy. The group side is what got hit hard. That is now coming back and firing on all cylinders.
WHAT ARE STR’S PROJECTIONS FOR THIS YEAR? Basically, more of the same, limited new supply —we’re expecting 1.3 percent supply growth. Demand is going to continue to grow—and that’s on top of a 66 percent occupancy. We’re forecasting that occupancy will be higher than it has ever been in the 25 years I’ve been tracking the industry, which is just incredible. Demand is up, supply is up a little bit. That means that occupancies continue to grow 1.1 percent or so.
What comes with that occupancy of 66 percent is pricing power—you know, compression nights. Hotels are full, and they can then charge higher rates. That’s really positive, and we expect it to last for the foreseeable future.
Now the question is, will hoteliers take advantage of the highest nationwide occupancies ever and price accordingly? Is the influx of new limited-service rooms going to put pressure on markets across the board and have a dampening effect on room rate increases? If you ask me next year, I could tell you. Right now, we think that 5 percent is doable. And if you add in the 1.1 percent occupancy growth, you get a 6.2 percent increase in RevPAR this year.
Looking at the industry, we’re expecting that the supply growth numbers are going to accelerate in late 2015 and 2016, and in 2017, and so forth. For now, this is arguably the best supply-demand environment that we will see in our generation. If you’re looking for a good time to be in the industry, 2015 will be it.
