Industry Giants Confident More Growth is Yet to Come

With occupancy, room demand, average daily rate, and revenue per available room achieving record highs, the travel industry is surely booming, and hoteliers who spoke at the 37th annual NYU International Hospitality Industry Investment Conference this week at the Marriott Marquis gave their votes of confidence that more growth is yet to come.

In April, the U.S. hotel industry achieved its highest occupancy ever at 66.8 percent, which amounts to roughly 99.4 million room nights, STR data shows. On an annualized basis, demand rose 4.5 percent, average daily rate increased 4.7 percent, and revenue per available room experienced an 8.4 percent boost, STR President and COO Amanda Hite explained during a data presentation. Meanwhile, there is limited new supply growth, with only a 0.9 percent increase, which is well below the 20-year average of 1.7 percent.

“Supply is an issue in some markets like New York, but occupancy continues to grow, room demand is growing, group demand is back, and our revenue growth continues to hit all time highs,” Hite said. “Barring any unforeseen black swan event that’s going to affect the entire global economy, we expect the next two years to be very positive for the U.S. industry.”

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Although the huge upswing coming out of the financial crisis has passed, the U.S. economy will continue to experience steady growth, said Jonathan Gray, global head of real estate at Blackstone, during the “Titans of Real Estate” panel. “For everyone in this room who is invested in the hotel business, favorable fundamentals will be good for real estate and hotel valuations for the next couple years.”

Markets that are beginning to add new supply, such as New York City, Miami, and parts of Texas, will likely translate into lower or negative RevPAR growth, Gray warned. “Wherever we’re seeing more advanced new supply, that’s where we tend to be a little more cautious.”

Barry Sternlicht, chairman and CEO of Starwood Capital Group, described it as a “Goldilocks Economy”—not too hot, not too soft. The economy is stronger than the latest GDP numbers would suggest, but Sternlicht advised investors to be careful. “You have to be cautious in what you buy and where you buy it. I think interest rates will rise and cap rates will stop falling.”

Favorable supply and demand conditions and a stable economy all bode well for the hotel business, said Chris Nassetta, president and CEO of Hilton Worldwide, during the “View From the Top” CEO panel. “I think the next few years are going to be exceptionally good years in this business, among the best we’ve seen. It is the simple laws of economics at work.”

Mark Hoplamazian, president and CEO of Hyatt Hotels Corporation, added that strong group business is another factor that will continue to propel healthy results over the next several years. “Corporate profitability continues to grow at a rate in excess of GDP growth, and that’s driving a lot of business travelers,” he said. “I think a lot of people were waiting around for group business to recover. And, in case you missed it, everyone—it’s back.”

Sébastian Bazin, chairman and CEO of Accor, expressed concerns over giving up too big a piece of the pie to the new digital players and sharing economy businesses. “We need to wake up, because the industry of today is great, but it’s not going to be as good in five to 10 years if you don’t adapt,” Bazin said.

With the industry in the 57th month of the cycle, Geoff Ballotti, president and CEO of Wyndham Hotel Group, compared the current cycle, which is in its 57th month, to the 112-month cycle that lasted from 1992 to 2000. Despite several consecutive quarters of supply growth, “you still only have to look at our domestic pipeline at 450,000 rooms, compared to where it peaked at the turn of the last cycle, to realize this cycle has a long way to run.”

The rise of select-service hotels was deemed one of the megatrends in the industry. Outside of a handful of major cities and resort locations, running full-service hotels in a traditional way with bellmen, executive lounges, and 24-hour room service is increasingly difficult, Gray said. “What you’re seeing happen is a move toward select service in a large way, and in the full-service area, maybe a move toward a full-service ‘light’ model.”

The shift is more in tune with the wants and needs of today’s customers, including fast Wi-Fi and a more technology-oriented stay with less human interaction. “You have two ends of the market,” Sterlicht explained. “You have the older generation that likes service still … and then you have the younger [generation], my children, who just want to go to their room, have the best Wi-Fi connection possible, and then go to the bar and they’re finished.”

There is demand for all segments, from economy to luxury, but low operating costs and strong profit margins make limited-service hotels especially attractive to investors. Nassetta said limited service is generating the greatest amount of demand in the largest number of regions. “Limited service around the world is quite pervasive,” he said. “That’s not to say the upper end of the business is not going to have growth…but I’d say the big megatrend is more mid-market driven.”

Photo credit: NYU School of Professional Studies/Mark McQueen