Healthy Hikes in RevPAR, ADR Set for Hospitality Sector

HOUSTON-According to Marcus & Millichap’s Hospitality Research Quarterly Update, the hospitality sector is pulling nicely out the recession; the report is forecasting an overall 60.7% occupancy, an average daily rate of $105.70 and RevPAR of $64.21 by the end of 2012. This would be a definite increase from 2011, which had 60.1% occupancy, an ADR of $101.60 and RevPAR standing at $61.06.

None of this surprises David Luther, Marcus & Millichap’s National Hospitality Group national director. He tells GlobeSt.com that the demand drivers are in place for robust growth in the sector. In Texas and Pennsylvania, oil and gas are driving demand, whereas leisure markets – such as Florida – are starting to recover as well. However, “there are risk elements out there that investors need to be aware of,” Luther says.

The first risk factor is what’s going on at the gas pump. Higher gas prices are likely to keep even the most dedicated traveler at home this year. “You can make the argument that higher gas prices could spur more in-state traveling and look at it that way,” Luther comments. “But it could adversely impact leisure travel; especially when you’re talking about markets like Florida or Nevada, that are destination markets.” Furthermore, oil and gas prices are likely to fluctuate this summer, especially with an active hurricane season predicted.

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The other risk factor, Luther goes on to suggest, involves hotels popping up on interstate highways in response to oil and gas activity. In Texas, there is a lot going on at the Eagle Ford Shale in the southwest corner of the state and at the Barnett Shale, in the western part of the Dallas-Fort Worth metroplex. The northeast isn’t immune either – the Marcellus Shale Field extends through Pennsylvania, New York, Ohio and West Virginia. All of this has led to hotels being built along routes directed toward these fields. 

The problem with such areas is that, unlike in the urban areas, there are no barriers to entry – anyone can put a hotel up at the side of the road.  And that’s all well and good, so long as natural gas continues coming from these shales. However, “if things dry up with some of these shales, that’s what’ll drive demand,” Luther notes.

Risk aside, there isn’t a whole lot of new supply coming on line, but there is continued demand from investors seeking out stabilized, well-running assets, generally of the select service, limited service and economy variety. “There’s a demand to buy distressed deals, but not so much in the hospitality industry,” Luther explains. “The investors understand there are great demand drivers pushing us forward, so they’d rather catch the wave now by taking over an existing operation that shows 24 months of stable operation.”

That appetite for stabilized hotels and motels will continue throughout 2012, Luther says, with everyone from REITs to private syndicates getting into the act.  But almost anything could be trumped by the upcoming general election. Though Charlotte, NC and Tampa, FL are hosting conventions and will see uptick in guests, election years tend to bring a lot of uncertainty, Luther comments.

But in all, “uncertainty hasn’t caused stagnation among investors when it comes to doing deals,” he  adds. “In certain markets, it’s a great time to get in, and investors understand if they wait too long, these deals will get a lot more competitive and pricing more aggressive.”