Hospitality is Booming

Date: 04/06/2015

As the economy has rebounded the hospitality industry has flourished. Is it time to get in, or out, and how long will it last? I recently invited three industry icons to the Commercial Real Estate Show to get their take on the sector.

Mark Woodworth of PKF Hospitality Research, Andrew Pace, from Strand Development and David Marvin of Legacy Property Group had plenty to say about the space we call home one night at a time.

Hospitality in 2014

“Last year was a terrific year by any measure,” said Woodworth. “Growth in demand took us by surprise. It’s really helped support pricing and set the stage for good growth ahead, at least for the next year or two.”

National occupancy rose to about 64.5% in 2014, 3 points above the long-run averages tracked by PKF. Greater scarcity across many markets and property types allow managers more pricing power.  Average daily rates increased an average of 4.5% last year across the industry. Rates are expected to continue rising this year.

“That excellent rate of increase is more than twice the long-run average,” noted Woodworth. “In real terms, with today’s low inflation, growth in lodging profits is approaching all-time highs.”

Nationally, the average daily rate is now around $115, averaged across all property types. Obviously some markets range much higher or lower. A few years ago only the high end performing well. Now all classes of property are active: high, moderate and low-end properties are enjoying steadily increasing demand.

Hospitality is benefiting from the current stability of economic growth. Increasing employment and growth in real personal income are the two variables that have the biggest impact on lodging. This recovery has really gotten traction in the past three years, allowing gains in travel, and showing up as more demand for hotel rooms all across the country.

Where will we be one year from today?

“Hoteliers are pretty optimistic bunch,” says Woodworth, smiling. “Maybe not unanimously, but it’s pretty pervasive.”

The demand pressure is beginning to encourage development, noted Andrew Pace. But new supply is lagging. Cost of construction has risen; everything other than capital is more expensive. Only recently can profits begin to justify building costs, and then only in some markets. You’ll see new construction this year in selective niches and markets.

Investors Viewpoint

Hospitality investment had a good run in 2014, although not quite as hot as 2006-7. We’re seen as a great alternative in commercial property.  Expect to see strong levels of investment interest across the sector this year.

What holds investors back? David Marvin said it tend to be concerns about market cycles. “Hotels reflect economic softening very rapidly, so when our industry is doing well, one thing we hear: ‘Tell us when the good times will end, and what will it look like?’”

Marvin pointed out another challenge in today’s growth market: good employees are hard to retain. Hotels being so labor-intensive, as unemployment falls, you’re probably not getting as much return on your payroll investment as you once did.

It’s tricky to talk cap rates on hotels; the range is so big it becomes meaningless. There are the standouts: the Waldorf Astoria recently traded below 2.0%. The real question really is which way are they moving? Cap rates are definitely moving downward, since the income growth has been very attractive. That trend is expected to continue for the next 2-3 years, while new product is still scarce.

Is it time to buy hotels?

For every buyer there is a seller, and vice versa. If you don’t see a trajectory where you can continue to add value, it’s time to sell. Alternatively if you see upside, have a property that’s got potential for a refresh, or can benefit from better management, it’s time to invest.

“Old hotels never die, they just change hands,” said Marvin, “Hotels are no doubt the most under-demolished asset class. Brands are innovating all the time, and older brands get left behind. Some hotels will be in decline until they are no more, and it’s best to shed these from your portfolio.”

The only two areas that haven’t fully recovered are small town and highway interchange properties. In those areas transactions remain somewhat depressed. But urban hotels, suburban and airport locations, and resort properties are all doing very well.

“In a recent sale, a well-known REIT sold 24 hotels for $240 million,” said Marvin. “an applied cap of 7.9% -before $65 million in necessary renovations. In effect, that’s more like a 6 cap sale on those 24 properties.”

The real question is what’s the length of the money? Some can only stay in a deal for 5 years, Marvin noted. The most common question we get is ‘when is the end coming and what will it look like?’ The answer is ‘we don’t know!’ We look at cycles, history tells us 7 to 10 years. So we’re on the long end of history right now. How long can you park your capital? Again, we don’t know. But, should start happening 3-4 years from now. If you’re already in the market or buying, hopefully you can leave your capital in for a 5-7 year window and don’t over lever.

“Market timing really should be part of your strategy,” said Pace. “On average the up cycle is 105 months of positive growth. We’re 68 months in to this one, and some say this cycle will go longer.”  

What’s different this time around is that a record number of people are using hotels; yet we don’t have a flood of new supply, so scarcity and prices are up. New development faces plenty of headwinds, but occupancy is pushing, and that should extend the positive cycle. Also, everyone, especially lenders, are more careful, which might make for a longer cycle for commercial real estate.

Trends in the Industry

Pop Quiz

Which had higher occupancy last year? Weekend or Weekday?

**BUZZ**

If you said ‘Weekend’ you win! A significant gap between the growth in weekend leisure travel and the weekday business travelers shows that leisure demand is what’s driving our recovery.

Why? The traveling public is feeling a bit more confident. With better employment and more optimism about the economy, the middle class taking their long-deserved vacations. And lower gas prices are certainly helping.

Some other key trends worth considering:

No More Rubber Chicken

The Total Guest Experience is a major theme. Personal service, full service, and food are all very important. Connecting with customers is essential, customer experience is key.

“Guests are looking for something better than rubber chicken, but it’s not only about offering great in-house food. We also introduce them to inspiring cuisine nearby. If a customer has an enjoyable experience in the area, it reflects on your facility.

See the USA

We are seeing record levels of international travel. 72 million International travelers visited the US in 2014, and they spent over $200 billion while they were here. We can increase this by another 50%. Congress is working (together, if you can believe that!) to shorten visa wait times.

One thing we’re doing is reaching out to China. Last year 103 million Chinese traveled abroad, but only 1.7% of those travelers came to the US. That’s a seriously untapped market.

Conventions & Meetings

Meeting business is strong – we’re booking at least as much or more business, but meeting planners are booking closer in.  This is unnerving to hoteliers, but bookings continue to be strong.

Business Travel

Business and transient bookings are getting stronger, but we have plenty of room for improvement during the week.

What has technology done for you lately?

Technology is no substitute for labor in our business. The industry essentially went online over 10 years ago, and now almost everyone books online. Today’s guest wants bandwidth; they bring their own toys. But keeping up with that bandwidth is important.

Actively managed social media can be a wonderful thing. It’s great way to connect with customers, and it really makes high-performing hotels shine. But neglect your social media image at your peril. Some reviews may be unfair, but overall hotels are much more accountable now. It’s brought up the quality for everyone.

On the flip side, because of technology the customer has alternatives like AirBnB, the online service where you can rent out your extra room or book a vacation space online. No longer a novelty, it’s become a significant lodging option.

Tips for Hoteliers

Labor is and will always be the most challenging part of our business. Hotels are extremely management intensive, and good people really matter. Hiring, training, motivating are critical to your survival. If you’re not good at that, hire somebody who is.

It’s all about people; the individual that a guest connects with is the face of your business.  Customer experience is everything, and hotels that are well operated are profitable.

Migrate to daily revenue management if you haven’t already, to maximize the sales at your hotels. Basically, it’s yield management. New systems are challenging to keep up with, but it really helps the bottom line.

Know who your best customers are. Not just what they’re buying from you, but what’s going on in their world. Are they are importers or exporters? Are they growing, are they struggling?

Guests want bandwidth. Stay on top of that and your guests are happier. The systems you installed two years ago are not adequate. Do what you can to be ahead of the curve.  Some customers will be quick to complain, but some just won’t come back.

We’ll leave the light on for you.