Hotel Metrics Will Continue Growth Streak

CALABASAS, CA—Amid gains in travel volume, all key measures of US hotel performance are expected to increase during 2014 and extend the hotel sector's multi-year run, Marcus & Millichap says in its fourth-quarter report on the sector. One metric that isn't expected to gain appreciably is supply: year to date, the increase in room nights has remained well ahead of the number of new rooms coming on line.

MMI's report projects a 1% rise in supply by year's end, “surpassing last year's rate of growth but a level well below historical norms.” For one thing, lining up construction financing remains “an imposing hurdle for many prospective developers to clear, while construction labor and material costs are rising in some markets.” Meanwhile, room nights will increase by 3.5% percent this year, fueling a 150-basis point jump in occupancy to 63.7%.

Across the US, hotel operators are enjoying greater pricing power, as demonstrated by a 4.4% rise in ADR through the first eight months of the year. “By demand segment, group ADR increased at a rate in the low-3% range over the past 12 months, but group demand is starting to recover after lagging US trends for a lengthy period,” according to MMI. “Recent gains in group room nights and positive advance booking trends will likely enable property owners to push up transient daily rates more aggressively in the near term.”

The increase in nationwide ADR is also the principal driver behind the 8% increase in RevPAR posted thus far in '14. “RevPAR growth is accelerating, with 11 of the nation's 25 largest markets posting double-digit gains this year, compared with only seven markets in the same period of 2013,” says MMI.

Leading the way in terms of “outsized rate-driven gains” is Nashville, encouraging a new wave of development in the Music City's downtown core. RevPAR growth in Atlanta and Tampa has also been elevated, confirming that “hotel recoveries in those markets are firming as local economies strengthen. The gain in RevPAR in both markets is primarily the result of occupancy growth, creating an opportunity for operators to push rate more assertively in the months ahead.”

 Longer term, MMI says, “ADR will further emerge as the main factor driving RevPAR growth and as a means for property owners to offset the higher expenses that accompany higher occupancy.” Accordingly, the nationwide ADR will finish out the year with a 4.5% increase, surpassing last year's sub-4% rise, and will help fuel a 7.1% jump in RevPAR to $73.51.

As for new construction, it has been largely concentrated in markets such as New York City and Miami, “where demand drivers are more diverse and capable of absorbing new supply.” In fact, New York, Miami and a handful of other markets account for one-quarter of the new rooms under development.

“The potential for overbuilding exists, but thus far new supply has minimally affected market-level performance,” according to MMI's report. “Hotel construction is occurring where there is unfulfilled demand, and not simply a suitable site.” Compared to the surge during the previous building boom, the uptick in construction spending this time around has been “rather tame.”