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In just one generation, the Orlando market and its surrounding area became one of the premier vacation destinations in the United States and the world. With a room inventory second only to Las Vegas, this tourist hot spot strongly felt the financial market meltdown of 2008.
However, the last two years have seen the hotel market undergo a strong recovery. In fact, the rate of recovery in the region’s hotel segment is stronger than for hotels nationwide. This trend and the lean operations many hotels adopted during the downturn should produce excellent operating returns for hotels in the region for the foreseeable future, assuming no overbuilding.
Improving Vital Signs
With a 2008 total room inventory in the metro Orlando region of 111,551 rooms and 437 properties, hoteliers could demand an average daily rate of $106.25. According to STR, in 2009 that daily rate dropped a very painful 11.8 percent to $93.70. This corresponded to a drop in occupancy from 65.2 percent to 60 percent.
Between 2008 and 2012, the total inventory of both rooms and properties increased. This growth saw the number of properties rise to 456 and total room inventory to 117,396 in 2012. The permanent and temporary closing of a number of properties prevented an even greater net increase in inventory.
The good news is that despite these increases in inventory, a rapid recovery began, and by 2011 the occupancy rate exceeded that of the 2009 bottom. Average room rates also continued to increase, averaging $97.22 in 2012.
The improving hotel market is a reflection of the broader U.S. economy. With rising consumer confidence and employment rates, more families are taking traditional vacations. Meanwhile, a growing number of companies are freeing up money for corporate travel and conventions as business rebounds.
The other piece of good news is that only a relatively modest increase in new supply is forecast for this year. Specifically, five properties and 1,130 rooms are scheduled for completion in metro Orlando during 2013. More than one-third of these new properties are in the downtown market. The units downtown are targeting the premium traveler who is willing to pay higher rates for luxury accommodations when traveling for business or pleasure.
Understanding the Metrics
Hoteliers live and die by the metrics of their marketplace. Like airline seats on flights, hotel room inventory perishes daily. That is the root of the importance of achieving the highest possible daily occupancy rate and daily rate. These two factors, of course, determine the total gross revenue of a property.
A major plus factor for the Orlando market and its submarkets is that the room night demand, or rooms sold, increased from 27.2 million in 2008 to 29.7 million in 2012. This indicates the strength of both the underlying demand in the market and a positive trend.
The results for the first half of 2013 support this optimism. Florida is showing more improvement in occupancy rates than the nation as a whole. Hotel occupancy during the first half of 2013 compared with the same period a year ago is up 5.2 percent statewide and 3.3 percent nationally. Of interest to local hoteliers, the average daily rate for Orlando came in at $106.83 during the first half of 2013, up 3.9 percent from the same period a year ago.
Assessing the Dynamics
These positive trends enable hoteliers and commercial developers to breathe a small sigh of relief. The wise players, however, are still applying the lessons learned during the downturn. The financial and operating pressures of the last few years have affected owners, investors and managers in the hospitality industry. The situation required operators to focus on controlling expenses while preserving a positive experience for their guests.
The Great Recession and slow recovery from 2008 to 2011 forced Orlando hoteliers to learn how to run much leaner and more efficient operations. The challenge for owners and managers is to remain prudent while profits tick up. The properties that were forced to close during the downturn are a sobering reminder of what can occur when hotel managers become undisciplined and lax.
The Orlando hotel market holds some unique advantages. It is host of world-famous tourist attractions and theme parks that attract more than 50 million visitors a year, many of them international visitors. These numbers and the Orlando region’s title of the most-visited destination in the United States are an enticement that will surely bring more developers and investors for another period of growth. Will that growth reflect lessons learned?
— D. Chris Smith, CEO and senior broker, THE Commercial Real Estate Specialists