Improving Credit Conditions Expected to Entice More Buyers Off the Sidelines In 2012
The U.S. lodging industry, benefitting from two years of sporadic recovery, should continue to enjoy gains in occupancy and pricing power through 2014, with rising profits luring greater levels of investment, according to a series of hospitality reports and outlooks released over the last few days.
PKF Hospitality Research, LLC predicted this week that revenue per available room (RevPAR) for U.S. hotels will rise 5.8% in 2012, the result of solid annual gains in occupancy and average daily room rates (ADR).
"Ever since the first quarter of 2010, growth in lodging demand has greatly exceeded the supply increase," reported R. Mark Woodworth, president of PKF-HR.
"We have seen six straight quarters of [room rate] growth, and are confident forecasting a sustained period of attractive industry profit growth," barring some huge economic disruption such as rising energy costs due to potential military hostilities with Iran, Woodworth wrote.
"U.S. hoteliers have never enjoyed such an extended period of favorable market conditions. This is truly unprecedented and will likely result in accelerated, and significantly greater, levels of capital investment into the domestic lodging industry," he added.
The number of sales of flagged select-service assets doubled last year, contributing to a 78% spike in sales of branded select-service, limited-service and economy hotels, Marcus & Millichap said in its first-quarter 2012 hospitality update, analyzing data from CoStar and other industry sources.
Investors are showing particular interest in select service transactions as capital continues to flow into lodging, according to Jones Lang LaSalle Hotels, which forecasts that 2012 volume of select service hotel portfolio sales will likely double over 2012.
"The select service sector is the most agile and resilient of the hotel transaction market. Its demand has quadrupled in the last 15 years, giving way to growth in the product offering," notes Al Calhoun, managing director of Jones Lang LaSalle Hotels. "An increase in corporate demand at branded upscale select service hotels is expected to bolster the performance for the overall sector in 2012."
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REITs accounted for 35% of transactions as measured by dollar volume, up from about 24% the year before. Properties in high demand areas of large markets such as Texas and California are often achieving the best prices for sellers.
"As property operations climb to former levels, the investment market is surging with renewed vigor as buyers push to acquire assets priced well below recent peaks," Marcus & Millichap said. Financing capacity is returning for deals with strong sponsorship and operating cash flows, whetting the appetite of investors for stable properties, many of which will likely trade in 2012 as buyers seek to take advantage of positive hotel fundamentals.
U.S. hotels rented out more rooms than ever before in 2011 and demand will only continue to rise in coming years as business and leisure travel continues to recover amid a dearth of new hotel rooms, Val Bauduin, U.S. hospitality leader with Deloitte & Touche LLP, said during a panel last week titled "U.S. Hotels: A Performance Review and Forecast for the Future."
After most major U.S. markets saw declines in the number of hotel rooms filled in 2009, often by double digits, the national occupancy rate turned positive in 2010 and a robust recovery took hold across the U.S. last year. U.S. occupancy averaged about 63% in 2005-2007, falling to 54.6% at its recessionary low point in 2009. It has grown steadily for two years, reaching 60.1% in 2011, and STR forecasts 60.4% occupancy in 2012 and 60.7% in 2013.
While occupancy has been rising steadily since the end of 2009, room rates were slower to recover. But that too has changed. Nominal ADR for U.S. hotel rooms peaked in 2008 at $107.39 before falling to around $98 in both 2009 and 2010. However, the ADR shot back up to over $101 last year and should jump to $105.45 this year and $110 in 2013, Bauduin said.
"What’s fascinating here is we’re predicting that we’ll be back to the peak within two years. I don’t think that any panel of experts last year would have predicted how fast [ADR] would rebound," he said.
The projected steep climb in revenue per available room completes the recovery picture. RevPAR dropped off a cliff during the recession, falling from $64.23 in 2008 to $53.51 in 2009. As occupancy has firmed up, allowing owners to raise rates, revenue improved in 2010 and 2011 and will rise to a projected $61.06 in 2012 and $66.81 in 2013, according to STR Global.
Lodging demand hit record levels last year in 30 of the 50 local markets covered in PKF-HR’s forecast reports. While the average annual change in the nation’s lodging supply from 1988 through 2011 was 2.1%, PKF-HR forecasts that new supply growth will remain less than 2% annually through 2016, leading to continued annual occupancy gains over the next 3-4 years.
Combined with occupancy increases in 2010 and 2011, the industry will experience an unprecedented six-year run of occupancy growth, Woodworth said.
With occupancy levels expected to exceed the STR long-term average of 61.9% in 2013 and beyond, "we are beginning to see operators capitalize on these favorable market conditions and increase room rates," he said. "We expect to see [ADRs] increase in excess of 4% per year through 2014."
In addition to the top-line revenue growth, hotel managers have implemented policies and practices that have improved operating productivity, resulting in strong bottom-line gains. With hotel profits already increasing by 30% since 2009, Woodworth said profits will continue to grow at an average 10.3% though 2014, far above the historical average of just fewer than 4%.
Since 2009, hotels in the luxury, upper upscale and upscale chain-scale segments have logged the greatest gains in room revenue, while hotels in the lower-tier upper-midscale, midscale, and economy categories have grown RevPAR at a slower pace.
During the recession, hotels competed based largely on price, with the rate compression blurring the distinction between room prices on two- and four-star properties, Bauduin said. With improved job growth and corporate profits, "luxury is now leading the recovery and expanding the chain scale, allowing different operators to again target their customer segments, and the benefits are trickling down from luxury to upscale and upper mid-scale," he added.
The national occupancy level for hotels in each of the upper-tier chain-scales will exceed 70% through 2016, leading to lack of availability during peak periods and greater pricing power for hotel operators, PKF-HR's Woodworth said. Some travelers will opt for less expensive lodging, to the advantage of moderately priced hotels, he said.