CHICAGO—The slow-and-steady recovery for the hotel industry got an overall “thumbs up” from opening general-session panelists at last week’s Midwest Lodging Investors Summit. But there are concerns, and the lack of increased valuations for hotels tops that list.
“With the rates and occupancies climbing, the values are not climbing as fast,” said John Jameson of Jameson & Company. “The values for upper select-service seem to be gaining more momentum, and that seems to be the top. The premium full-service hotels have grabbed the lion’s share of valuation.”
Jameson said “thumbs up” to the overall industry and to the performance in the Midwest.
“It’s always steady: no big upswings, no big downswings,” he said.
The other panelists agreed:
- “We say thumbs up,” said Paul Kirwin, president and CEO of Northcott Hospitality, a Minnesota-based company that operates restaurants and hotels and owns the AmericInn hotel chain. “It’s stronger in global destination markets benefiting from inbound tourism. And the Midwest I’d say is softer than those but is improving.”
- Sanjeev Misra, senior managing director of Chicago-based Paramount Lodging Advisors: “It’s definitely conflicted emotions. The operational side definitely thumbs up. We’re seeing consumer demand come back, occupancy, rate, revenue, income have come back greatly, and we have good supply constriction. So the hotels are performing. The thumbs down is the investment side. We still have some challenges with the capital stack, the availability of financing and a lot of unknowns … union laws, health care, other things that kind of cloud the future.”
- Hans Detlefsen, managing director of HVS Global Hospitality Services in Chicago: “We are definitely in the midst of a strong recovery. We’re in the phase of the recovery where hoteliers are shifting away from occupancy growth and are shifting toward (average-daily-rate) growth.”
- John O’Neill, director of the School of Hospitality Management at Pennsylvania State University: “Its overall thumbs up, but as other panelists have said it’s a little bit dicey because we’re so concerned about things that affect lodging demand like unemployment, which we just don’t seem to be able to get a handle on that. Financing is a concern in terms of availability, and I think until the larger economy shows more robust improvement, financing will continue to be a concern.”
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Hot spots
As with any recovery, there are hot spots, and the Midwest is no different. Kirwin pointed to the oil/shale industry boom in northwest North Dakota as a pleasant surprise.
“You can’t get a room; you can’t get an apartment in that area. People are sleeping in cars,” he said. “There aren’t many places like that in the Midwest.”
The Chicago area was mentioned across the panel as an improving market. Data from STR, the parent company of HotelNewsNow.com, indicates that year-to-date through May Chicago’s occupancy is up 4.7%, its rate is up 5.7% and its revenue per available room has increased 10.7%.
“We think that’s in general due to manufacturing; (manufacturing) has been a sector that has improved in the last year or two years,” Kirwin said. “The areas of the Midwest where manufacturing is a factor, they’ve been improving perhaps a little better than others.”
Misra said Chicago’s supply growth has been basically flat during the past couple of years, and that has aided in its recovery. He said there are other factors to also consider when determining a recovery’s pace.
“The investment community has been coming back to the urban centers. They’re seeing basises lower than they’ve been able to get into these markets in a long time due to high barriers to new development, and Chicago has really led the pack in that,” he said. “We saw some transactions last fall and this year at the beginning of the year, and there’s going to probably be some pretty significant transactions in the Chicagoland area coming out in the next few months.”
Jameson was part of a transaction late last year in which Hyatt Hotels Corporation sold three Chicago-area hotels for US$51 million.
“What I saw when I closed the transaction in November was very strong interest in coming back to Chicago,” he said. “Chicago had this dark cloud over it with the transition of where are we going with the mayor’s office, taxes are a big concern here, and one of our biggest problems here—which I think has slowed—we were losing conventions at a very fast pace. But with the union negotiations and what not being finally addressed, the cost associated with doing business with (the McCormick Place union) and with unions, we’re not losing them as fast anymore. … We still have a couple hotels that are sitting there vacant that haven’t been finished yet. There was this dark cloud and I think it’s lifted for Chicago.”
Transaction activity
Jameson anticipates transaction activity picking up in Chicago, and it should be at a brisk pace by 2012 and run through at least 2014.
“Everybody calls it ‘extended for ‘10’ but what it actually is, is the banks had their own problems with industrial, retail, and of course residential was the beginning of it,” he said. “They had to work out those issues first, so what they did is let the owners continue to own the asset—we’re not going to take it back, run it as it is. It wasn’t advantageous for them to take it back when the volumes were so low. Now that volumes are rising again, (2010-2011) was a lot of note selling, now we’re going to transition into ’12 to ’14, ’12-’15, that’s when the transaction volume is going to be the strongest.”
Detlefsen said thus far in 2011, transaction volume in Chicago is up 13%, and he expects that to accelerate.
“We’ve been seeing values rebound quickest for the highest-quality assets, especially in gateway cities,” he said. “The (real-estate investment trusts) have become pretty active. They’ve got a low cost of capital. I think part of the thought process may also be the inflation these high-quality assets have seen. Over the long term, historically, their ADR grows faster than inflation.”
What it all boils down to is what the panelists said they hope is an environment that’s ripe for increased hotel values.
O’Neill’s State of the Industry presentation indicated the hotel industry lost US$8 billion in values during the last recession, in part because of the lost rate fostered by online travel agencies. However, the average overall value of a U.S. hotel is US$87,957 per room—a 12.3% increase from this time last year, according to the Penn State Index of Hotel Values.
The Penn State Index of Hotel Values
“Ultimately it comes down to individual markets and individual properties. So is it an urban or suburban market? What are the capital expenditure requirements? How many years are remaining on the franchise for that particular property? What are the (property improvement plan) requirements for that particular property?” O’Neill said. “So in terms of an index, sentiment is very important. But in terms of valuation, ultimately it comes down to what is going on in a market. If a market is showing robust ADR increases, which some markets are starting to show, then that’s a market you can be really optimistic about.”
