Hotel Rates Poised to Rise in 2013

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A combination of record hotel demand and scant construction combined to drive up room revenues by more than 4% year over year in 2012 despite a stumbling economic recovery. And assuming that lawmakers mitigate detrimental effects of the fiscal cliff sufficiently to avoid a recession, forecasters and major hoteliers are calling for even greater gains in 2013.

Among the hotel owners anticipating a strong year ahead is Blackstone Group. Most of the New York City-based private equity firm's US hotels posted 5% to 7% year-over-year growth in RevPAR in 2012, according to Tyler Henritze, a senior managing director in Blackstone's real estate group.

“We continue to be pleased with the performance of our hotels and expect that positive RevPAR trend to continue even in the face of a relatively weak overall economic recovery, simply because there is very little new supply,” he says. “That combination allows for fairly healthy RevPAR growth.”

Blackstone's hospitality holdings include the Hilton Worldwide chain, the La Quinta and Motel 6 limited-service hotel companies and a one-third interest in Extended Stay Hotels, as well a number of full-service properties. RevPAR growth in the portfolio—and for the larger market—was weaker than average in New York, where new supply and the soft financial services sector give hotel managers less pricing power, Henritze says, while the firm's San Francisco properties have outperformed its other hotels.

“San Francisco has just been on fire, driven by the strength of the technology sector and the almost total lack of new supply,” Henritze says. Blackstone's full-service hotels in San Francisco include Sheraton Fisherman's Wharf, Parc 55 and the Hilton San Francisco. The firm acquired its controlling interest in Parc 55 in 2012.

Other hoteliers report similar revenue growth, and many are taking advantage of this strength to grow room counts through acquisitions, renovations and even construction. The consensus is that hotel revenues in major markets will remain strong until new construction shifts the balance of pricing power away from managers and reins in room rates.

Starwood Hotels & Resorts opened 71 hotels in 20 countries in both emerging and developed markets in 2012 and signed more than 125 new hotel management and franchise agreements, surpassing the previous year's deal signings by approximately 13%. That's the highest number of deals it has inked in a year since before the recession, according to Simon Turner, the company's president of global development. He affirms that the company's positive momentum will continue in 2013.

“We see significant opportunities in established markets like the US, where little growth and capital constraints over the past several years have created record-low supply and continued interest in conversion opportunities,” Turner says. “We're particularly excited about the development momentum we're seeing with our select service brands, such as Aloft and Four Points by Sheraton. Aloft will open 20 hotels globally this year; 13 of those are in North America and of those, five are conversions of existing hotels or adaptive reuse projects.”

Loews Hotels & Resorts will invest $175 million to renovate its properties in 2013 as it expands its client base with new services and offerings, says Paul Whetsell, its president and chief executive. The New York holding company had 17 hotels when Whetsell joined the firm in January 2012, and he plans to double the size of the company over the next two to three years, chiefly through conversions of existing properties. “By 2015, we will be at 34 to 35 hotels,” he predicts.

There are plenty of performance indicators to support such expectations for growth. The hospitality industry just closed out its second consecutive year of record demand, as measured in total room nights sold. US hotels tracked by Hendersonville, TN-based research firm STR sold an all-time high of more than 107.46 billion room nights in 2011, and STR's preliminary calculations suggest that demand in 2012 bested that total by 2.8%. In 2013, demand will increase by another 1.2% over last year's figure, according to STR's projections.

Despite operating in a lackluster economy, US hospitality sector performance improved by virtually every metric in 2012. Preliminary tabulations for the year showed the average daily rate climbed to $106.17, up 4.3% from the previous year, according to STR. Thanks to a minimal supply gain of 0.5% from new construction, occupancy rose to 61.3%, STR found. That equates to a 2.3% increase year over year.

Perhaps most significant for owners and operators, climbing room rates and greater occupancy drove up RevPAR to an estimated $65.08 per night, a hefty 6.6% gain from the previous year, according to STR. And if forecasters have it right, average revenues will grow stronger in the months ahead.

The US lodging industry turned the corner in the second quarter of 2010 and has been experiencing a healthy recovery trend that will continue through 2016, according to forecaster R. Mark Woodworth, president of PKF Hospitality Research LLC in Atlanta. “The industry continues to get better,” Woodworth says, “and at a faster pace than we had anticipated.”

Those improvements will help operators to boost room rates by an average of 5.4% each year for the next four years, Woodworth predicts. “One of the more remarkable aspects of this recovery is that in spite of all this economic uncertainty, we've had this demand recovery and, for two years now, consistent increases in ADRs. So in a very real way, there's no reason to think we won't see more of that in 2013 and beyond.”

One reason behind that conclusion is upward movement in the average occupancy rate, which was on track to end 2012 at 61.5%. PKF expects occupancy to reach 62.1% by the end of 2013, and while that level is below the pre-recession peak of 63.1%, it would exceed the US long-run average occupancy rate of 61.9%, Woodworth says.

Hotel managers in previous economic cycles have found the long-run average to be a tipping point, at which they gain sufficient leverage to demand higher prices for rooms, according to PKF. “When we break through that long-run 61.9% average, scarcity becomes more common and hotel managers can begin more aggressively increasing room rates,” Woodworth says.

The prospect of filling hotel rooms more often and at higher rates is an equation that hotel managers salivate over. According to PKF, that scenario will result in average annual RevPAR growth of 7.2% for the next four years—more than double the historic long-run average.

Some markets will require some more vigilance than others to avoid a rate-crushing onslaught of additional supply. Construction in New York City in particular has put hotels there at greater risk, says Raymond Martz, CFO at Pebblebrook Hotel Trust in Bethesda, MD.

“That's the one market where there is some supply concern,” Martz says. “But fortunately, if you look at Lower Manhattan, demand growth has been tremendous. Lower Manhattan on a trailing 12-month basis is at 85.4% occupancy—that's the highest occupancy market in the country.”

Looking beyond New York, demand has already eclipsed the peak room nights sold before the downturn in more than half of the urban gateway markets where Pebblebrook owns hotels, Martz says. Supply lags the demand for hotel rooms in those cities, which include Miami, San Francisco, Boston, Seattle, West Hollywood, Beverly Hills, Philadelphia, and Washington, DC. Martz contends that a dearth of hotel construction is one of the most positive factors affecting US hotels today.

While owners and operators of existing hotels work to bolster the bottom line through ADR while supply lags demand, a few hotel groups are counting on new construction to increase market share and help their brands to outperform competitors by introducing the latest hotel services and property concepts.

Approximately 23% of the hotel rooms currently under construction in the US, or about 20% of the total pipeline, will carry a Hilton flag, according to Bill Fortier, SVP of Americas development at Hilton Worldwide. “We consistently have a 20%-plus share of the new supply, which is great for us,” says Fortier, who is responsible for developing both the managed and franchised businesses for all of Hilton's brands in the region.

Most of the new properties that Hilton targets for potential franchise or management deals are in the focused-service segment, he says. “That certainly was where the money was headed in 2012, and that will continue in 2013,” he says. “It's really headed to those higher barrier-to-entry markets: city centers, university towns, anywhere with stable demand from varying demand sources and an inability to rapidly increase supply.”

Hilton's Doubletree brand has been growing rapidly, chiefly through conversions, and numbers more than 250 hotels in the US and 300 globally. Among Hilton's focused-service brands, the new midmarket Home2 Suites is poised to grow, with about 70 hotels in the pipeline.

Forecasters and hotel operators keep a close eye on when new supply is likely to hit the market. And although completions are expected to remain muted in 2013, the pipeline is beginning to revive, according to Lodging Econometrics, a research firm in Portsmouth, NH that tracks hotel development.

“Quarterly construction starts are at their highest level of the past 11 quarters,” says LE president Patrick Ford. On a trailing four-quarter basis, hotels that began construction by the end of the third quarter in 2012 totaled 614 projects and 70,930 rooms, marking the seventh consecutive quarter where annualized trends have increased, he said. Third-quarter pipeline metrics were the most current available when this report went to press.

In 2013, hotel openings will increase to 41,753 rooms in 393 new properties, up only slightly from 2012's output. In 2014, new supply will advance to 48,720 rooms in 432 new hotels, LE predicts.

With forecasters calling for increasing demand for hotel rooms in 2013 following two record-setting years in the number of room nights sold, STR's projection of a 4.4% increase in ADR is conservatively small, says SVP Jan D. Freitag.

“Room rate growth is going to be healthy next year, but given the unprecedented level of demand, we would have expected it to be higher,” he says. “Operators don't have a lot of visibility into room bookings in the future, so they are pricing as if demand is not going to materialize, from a position of uncertainty. We're suggesting that demand is going to materialize, even though you don't see it yet.” 

SIDEBAR: Hotel Investment Volume Thins As Bidding Drives Up Prices

Hotel investment specialists say healthy property fundamentals will continue to draw buyers and equity investors to the sector in 2013, but high prices have dampened hopes for finding steals.

“In the markets in which we want to grow—major gateway cities in North America—I wouldn't say there are any particular bargains out there,” says Paul Whetsell, president and CEO of Loews Hotels & Resorts. “We're able to be pretty selective and go after properties that meet our brand standards, and sometimes we have to buy a hotel and bring it up to our standards.”

Lenders have grown increasingly receptive to financing hospitality acquisitions, particularly for buyers with a strong balance sheet and willingness to provide substantial equity, Whetsell says. Loews tends to buy properties it can improve through branding and efficient operations, and it uses conservative leverage of 50% to 60% of the purchase price. “If you take that approach, financing is available.”

Transaction volume in the sector appeared to be leveling off at the end of 2012; Newmark Grubb Knight Frank tracked 107 significant single-asset hotel sales in 2012, with a collective value of nearly $7 billion. That marked a substantial decline from 2011's total of 158 transactions for more than $10.9 billion.

“The public hotel REITs have slowed their transaction volume considerably,” says Jonathan Falik, head of hospitality capital markets for BGC Partners and head of hotel investment sales for Newmark Grubb Knight Frank. It's unclear whether last year's volume decline was due to economic uncertainty or simply sticker shock as competitive bidding drove up prices. On a per-room basis, average hotel prices have risen steadily over the past four years to reach $257,836 per key in 2012, up from $235,902 the previous year, Newmark found. Price per key was well below $200,000 until the previous peak year of 2006, when the average shot up to $291,610.