GlobeSt.com EXCLUSIVE: Hospitality Industry Wagers on Luxury Growth

"They're selling the experience not just a room for the night," Michael Straneva, national director of transaction real estate for the New York City-based Ernst & Young LLP, tells GlobeSt.com. "There's a segment of the population that is pretty differentiating in what they think a brand is. Is there a point there will be saturation, absolutely. But, I'm not sure it's right now."

Straneva, like others in the industry, is ending a whirlwind week at the Americas Lodging Investment Summit in Los Angeles. And the feedback from all is that the industry not only has solidly recovered from its hard times of post 9-11, but is braced for a third consecutive year of record-setting growth in high-end sectors.

The telling is in the projections. According to E&Y's 2006 Lodging Report and Hendersonville, TN-based Smith Travel Research, luxury brands' rates will increase 7% this year to $269 per night and RevPAR will pick up 8.7% to hit $193. The sector's occupancy will climb to 71.7% for a 1.1% gain. In the upper upscale sector, the rate is primed to climb 6.9% to $150 per night; 8.5% increase in RevPAR to push it to $150; and a 1.1% climb to nudge occupancy to 71.9%.

"This is the perfect storm," says Arthur Buser, managing director and head of West Coast operations for Chicago-based Jones Lang LaSalle Hotels. It's unprecedented times." Not only have the stars aligned for the fundamentals, but the change in consumers' mindsets is stoking the fire for more luxury and upper upscale rooms. "In post 9-11, they believe they deserve a vacation and they deserve a luxury vacation," he says. "People will save up a whole year for that vacation. And, they don't mind spending their money on it. Because it's a customer preference industry, I think you'll continue to see a lot of new brands come on line."

Straneva says the rash of new high-end brands is the most to hit the streets since the extended-stay product rolled out in 1998. Today's customer, he says, "is looking for an experience rather than a thing." As a result, the industry's innovators are catering to discriminating customers with amenities and product types as they dedicate more and more space to build residential components into practically all high-brow properties in resort locations, feeding the appetite for the elite as consumers buy into private residence and destination clubs, condo hotels, timeshares and fractionals.

"Discriminating customers want better overall rooms, more amenities," says Thomas J. Corcoran Jr., president and CEO for Irving, TX-based FelCor Lodging Trust Inc., "and they're willing to pay for it if it's done right. It's one of the strongest lodging markets that I've ever seen."

From a transactions' perspective, Straneva says the industry's in the throes of the best times since 1996 when the Japanese, REITs and Starwood Hotels & Resorts LLC were buying assets. Cap rates are low; sale prices are below replacement cost; and supply is in check. The Boston-based Torto Wheaton Research Inc. projects average annual returns of 12.1% for the next decade.

"There are smart people making bets on both sides of the equation," Straneva says about the buyers and sellers alike of hotels and brands. "It's one of those perfect markets with a big group betting with their properties." Just in Dallas alone, La Quinta Corp. and Wyndham International Inc. were sold just months apart to New York City-based Blackstone Group, which used part of the properties to launch its own luxury brand.

Straneva, like others in the industry, says the ride is far from over. "There will be several more years of good growth," he predicts.