[IMGCAP(1)]

IRVINE, CA—Economic trouble abroad means foreign travel is expected to decrease, plus the hospitality sector is reaching a maturation point that limits room-rate growth, presenting challenges in the hotel market, according to a soon-to-be-released report from Auction.com. We spoke exclusively with Anthony Falor, managing director of the firm's hospitality division, and Peter Muoio, its chief economist, about how the sector can hope to achieve growth in the near future.

GlobeSt.com: With foreign travelers to the US expected to decrease due to weakened currency in some overseas markets, what can hotel operators do to either entice foreign travelers or to make up for the potential shortfall?

Falor: Markets like New York City that have enjoyed heavy foreign travel are starting to turn to other forms of business, such as SMERF (social, medical, educational, recreational and fraternal) that they may not have focused on in the past. This helps fill the void that foreign travel may be leaving. We've also seen some more third-party online-travel-agent use, whereas before operators weren't relying on that as much. Lastly, we're seeing hoteliers target their marketing toward international economies that still have strong currencies and travel patterns, like British or German travelers.

Muoio: That's really an issue for select markets where foreign travel is a key element. New York is most clearly potentially affected by this, but I also think of markets like Orlando, Miami, DC and Hawaii, where foreign travel is a bigger element of overall hotel booking than others. Operators can market to where strengths may lie. The UK, which doesn't use the euro, is one option. They can also grab some of the domestic travel in place of some of the international travel, although foreign travelers tend to spend more when they're here than domestic travelers do.

GlobeSt.com: What factors will enable room-rate growth, since you expect this growth to simmer down over the next several years, according to your report?

Muoio: There are two things going on. One is, we've seen such robust room-rate growth already that when we look at the growth rate going forward, it's going to look lower—it's a simple math thing. Because of the issues we just spoke about with the dollar, one of the things operators can do to attract foreign travelers is to soften up on room-rate growth. Simmering down is not a bad thing; the hospitality expansion is just in a mature place.

Falor: Because of where we are in the hospitality cycle, we will not see the sizeable increases in year-over-year rate growth as we have historically seen in the past 3 to 4 years. We will see limited room-rate growth over the next few years because we're starting to see new room supply become a factor. A significant pipeline has been building since late 2013 into 2014, and 2015 has been very robust. A lot of these 2013 and 2014 properties are starting to open, with the 2015 pipeline being as large as it is, it limits the ability to increase rates based on the competitive nature of the market. That being said, the hotel segment is still in overall good health.

[IMGCAP(2)]

GlobeSt.com: What types of hotels are experiencing the greatest growth in development and investment nationwide?

Muoio: On the development side, by far the biggest pipeline of supply is in the combination of upscale and upper-midscale hotels. This is different from the past. It used to be the strong supply came from easy-to-build, lower-scale economy-type hotels along the highway that are easy to throw up. But Smith Travel Research reports that of the recently opened new hotel-room supply, some 70% is in upscale and upper-midscale hotels. Yet those two segments together account for about 25% of the existing supply, so it's way out of whack with what we're building. It's the sweet spot for where development is taking place.

Falor: Upper-scale select-service and upper-midscale select-service hotels will continue being the greatest opportunity in hotel development and investment opportunity in the US overall. We also see developers taking advantage of huge opportunities with developing branded products—typically from the Marriott, Hilton, IHG and Starwood families. Opportunistic developers are also taking older class-C office buildings and converting them to hotel projects or taking large-scale buildings and either repositioning or constructing new dual-branded products in the same family. That's where the most development dollars are being funneled.

GlobeSt.com: What else should our readers know about the hotel sector?

Falor: The industry is healthy, but there's an interesting dichotomy between primary- and secondary-market growth and tertiary-market growth. The picture isn't optimal everywhere. There is risk right now in markets that are more oil or mineral dependent; with the decreasing price of gold and oil, we're not seeing as much development or exploration in those markets. Foreign travel, because of the strength of the US dollar, is somewhat of a risk, but the government is doing more through the American Hotel & Lodging Association to promote travel to the US as a destination, and we as a country, are making it easier for foreign travelers to visit and spend their money in the US. We will see foreign travel somewhat decline, but as long as corporate and discretionary travel (Baby Boomers) spending continues to be consistent then demand should be stable and predictable.

Muoio: There are significant differences by market in terms of demand and supply. There's been a dramatic falloff of room demand in Houston corresponding with a drop in oil prices because of less business going through there. In San Francisco and San Jose, we're seeing the opposite: phenomenal room demand with the tech market and business flow through those markets. The supply side is similar—supply is up in percentage of existing stock; in the recent period, we added 1.1% to the stock, but some markets are seeing significantly more supply. We are watching out for those markets because of that. We're worried more about New York because of the dollar situation, but we're seeing a significant amount of supply coming online in a few other markets, while in many markets supply is quite tame.