HOUSTON-Marcus & Millichap Real Estate Investment Services’ Q4 hospitality research report can be best summed up in two words: Mixed bag. On the one hand, the summer travel season did lead to an improvement in the sector; but on the other hand, continued economic uncertainties mean the crystal ball is cloudy on whether that improvement in the hospitality sector will continue.
The report’s numbers bear this out. Though occupancy, ADR and RevPAR have all increased year-over-year (59.8%, $101.29 and $60.56, respectively), supply growth has dropped from 2% to 0.5% from the same time last year, while demand growth dropped from 7.8% to 4.4% year over year, meaning revenue growth only inched upward from 7.8% in 2010 to a forecasted 7.9% this year.
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And according to David Luther, Marcus & Millichap’s national director of the national hospitality group, none of this is really a surprise. Rather, 2011 numbers so far seem to be an extension of 2010’s says Luther, who operates out of Marcus & Millichap’s Houston and Fort Worth offices.
“What we saw in 2010 was limited construction, thanks to the capital markets being what they were, and we also saw prices decreasing in the limited service sector,” he tells GlobeSt.com. All of that occurred along with an uptick in business and leisure travel, he noted, pointing out that, “rolling into 2011, all those trends continued.”
But care needs to be taken when it comes to making blanket assumptions about hospitality on a national basis. Luther explains that, with hospitality being a regional phenomenon, and with business travel tied close to regional economies, some areas did better than others in 2011. In energy related markets, such as those throughout Texas and the inner mountain west, business has been more or less sustained which, in turn, has led to small increases in ADR and larger increases in occupancies. The report points out, for example, that increase in room demand in Houston increased by about 11.5%. The surprise here, however, is that Detroit came in a close second, topping out at around 11%.
Detroit? “As the auto industry continues to improve, so does hospitality,” Luther says.
Another interesting factor in this report points out that Tampa, Miami, Phoenix and Los Angeles – areas hit hard by the sub-prime housing collapse and recession, are also reporting large increases in room demand. Minneapolis is as well. The reason for this increase, Luther says, is because these areas are international gateways; and a lot of international investors are coming into the United States to both buy hospitality assets and to stay in them.
The converse is true as well, which is why Georgia and the Carolinas are struggling. Certainly, the Carolinas are destinations for leisure travel, especially golfers. However, “if you’re solely relying on leisure travel in today’s economy, that’s not good enough,” Luther says.
Luther goes on to say that the trends we’re seeing now will likely continue into 2012, but points out that there is a great deal of uncertainty because of what’s happening in Europe and the fact that the U.S. is headed into an election year. In states seeing positive trends in hospitality, operators might push rates slightly, but are more interested in keeping their properties full. Furthermore, institutional players will continue their acquisition strategies of acquiring high-end assets.
The big change, on the investment side, is that more distressed hospitality properties will come onto the market, providing more opportunity for private capital investments. “Banks are becoming more willing to do short sales than to go through the foreclosure process,” Luther comments. “They’re taking back the properties, but they’re equally quick to get them off the books, and they’re looking to purge some of that distress.”
What about construction? Don’t look for it in 2012, Luther says. “Why develop when you can pick up a distressed hotel below replacement cost?” Luther says. “Until some of that product gets absorbed, developing doesn’t really make financial sense.”