Investors Keep Checking In
This is an HTML version of an article that ran in the May 2014 issue of Real Estate Forum. To see the story in its original format, click here.
Whether you look at occupancy, RevPAR, average daily rate, NOI or any other hotel industry performance metric, they all tell the same story: the sector is thriving. In fact, it’s hitting record-high levels month after month and quarter after quarter across all property types and around the nation.
The hotel market isn’t showing signs of slowing down either—at least, not in the near term. That positive story is bringing new investors to the party and creating new capital sources. But after 2015, all bets are off, according to investors and analysts.
“Things are really good for existing properties,” says Jan Freitag, SVP at Smith Travel Research. “In the first quarter, RevPAR grew 6.8%—driven mostly by a 3.8% increase in room rate—mainly because of the interplay between supply and demand. Supply is growing but it’s still low compared to other demand peaks and demand is still high.”
“Business travel is doing well,” he continues, “there’s healthy leisure demand and group business is picking up. We’re selling more rooms than ever and, at the same time, the room supply isn’t growing quickly.”
R. Mark Woodworth, president, PKF Consulting, tells Real Estate Forum sister publication GlobeSt.com, “An accumulation of market, operational and economic factors has resulted in a business environment that is very conducive to increases of both the top-line and bottom-line.”
Adds Scott Smith, SVP, PKF Consulting, “Nationally, we’re in the sweet spot where both occupancy and average daily rate are increasing to pre-recession levels in most markets. In the top 10 markets, there is a growing demand base of corporate users with below average additions to supply. Due to the increase in revenue created by all of this, there’s been an increase in operational efficiency, so we are forecasting unit-level NOI increases of 12.4% in 2014, and another 14.2% in 2015.” The hotel sector has maintained annual profit growth of greater than 10% each year since 2011, the longest unbroken streak since the 1970s, according to PKF.
Still, Freitag cautions, “The pipeline is heating up; we have more rooms under construction than we did a year ago. In New York City, the number of rooms available in the first quarter was up 5.6% year-over-year. That’s a lot, and we don’t expect that number to ease. So frothiness is definitely of concern in the investment community and people are watching what happens.”
JP Ford, SVP and director of business development, at Lodging Econometrics, was even more concerned. “At the end of the first quarter of 2014, there were 180 hotel projects in New York’s hotel pipeline, or 30,304 rooms. That is 20 additional projects from the end of 2013; that’s a pretty significant rise.”
And even though New York City is something of an anomaly, the pipeline in gateway cities generally is something to watch, Ford adds. “For that same time period, Houston had 100 projects, Washington, DC had 85, Boston had 49 and Los Angeles had 60, so the pipeline is pretty significant in urban centers around the country.”
Nationally, he notes, “The growth rate in the pipeline since the third quarter of last year is 14% by the number of projects and 13.5% by the number of rooms. At the end of the first quarter, it stands at 3,226 projects and 407,235 rooms. We have about 33,000 more rooms in the pipeline than at the end of 2010 and we’re 23,000 shy of how 2009 closed. Some people may look at that and say that’s nothing, but the significant part of the pipeline is the momentum and there’s nothing in front of it that’s going to stop it from growing.”
Next: Fast and Furious