ATLANTA — Healthy real estate fundamentals in the U.S. lodging industry are setting the stage for increased capital investment and double-digit gains in profits for hotel owners during the next few years, say researchers.
A challenging lending climate for developers also is helping to ensure that supply is held in check. The positive outlook is one of the storylines to emerge from Monday’s opening day of the 24th annual Hunter Hotel Investment Conference at the Marriott Marquis in downtown Atlanta.
U.S. hotels rented more guest rooms in 2011 than ever before, according to Hendersonville, Tenn.-based Smith Travel Research. Meanwhile, PKF Hospitality Research observed new records in metro-level lodging demand in 30 of the top 50 markets it tracks.
“By anybody’s definition, you would therefore say demand has fully recovered. Other things have not, but the demand side of the equation has fallen into place,” remarked Mark Woodworth, president of Atlanta-based PKF Hospitality Research, during a short presentation on Monday to several hundred conference attendees from across the Southeast.
PKF’s forecast calls for revenue per available room (RevPAR) at U.S. hotels to rise 5.8 percent this year, the result of a 1.6 percent increase in occupancy and 4.1 percent gain in the average daily room rate (ADR). The outlook for hotel owners and operators is bright for the next few years, emphasizes Woodworth. It certainly helps that the industry has posted six straight quarters of ADR growth.
“With occupancy levels expected to exceed the Smith Travel Research long-run average of 61.9 percent in 2013 and beyond, we are beginning to see operators capitalize on these favorable market conditions and increase room rates. We expect to see average daily room rates increase in excess of 4 percent per year through 2014,” wrote Woodworth in a news release distributed Monday.
In addition to growth in top-line revenue, hotel managers have implemented policies and practices that have enhanced the productivity of hotel operations, thus resulting in strong bottom-line gains, Woodworth added in the news release.
“Individual hotel profits already have increased by 30 percent since 2009. Our current forecast calls for profits to continue to grow at an average annual rate of 10.3 percent through 2014, which is a substantial increase over the long-run average of 3.9 percent,” wrote Woodworth.
Wild cards in play
The main drivers of the recovery in hotel demand in 2010 and 2011 were robust corporate profit growth, healthy real personal income growth and low room rates, Woodworth told conference attendees.
Corporate profits in the U.S. reached a record $1.97 trillion in the third quarter of 2011, according to Bloomberg, based on the most recent data from the Commerce Department. That figure was 7.5 percent higher than the third quarter of 2010.
Moody’s Analytics projects a moderating trend in corporate profit growth. At the same time, Moody’s has become less optimistic about the level of growth in real personal income going forward. “It’s still positive, but again not as robust as Moody’s had been thinking,” Woodworth told the audience.
There is lag of 6 to 8 months between movement in the leading indicators and lodging demand, pointed out Woodworth. “We are going to see a continued slowdown in demand growth — still positive but not nearly as robust as we’ve seen for the last 8 quarters. We think that is going to show up in the back half of this year, and then turn around and begin to get better.”
PKF’s forecast is based upon Moody’s January 2012 economic forecast, which assumes no disruption to the supply of oil from the Middle East and that the price of oil will remain below $110 per barrel throughout 2012.
Developers held at bay
While room demand remains strong and new hotel supply coming on line is quite low by historical standards, many developers are frustrated that lenders are so reluctant to finance new construction. Several panelists at the show indicated that only the strongest sponsors with the best projects at well-located sites are able to secure construction financing today.
“The smart money is building right now because you are obviously riding the upside. It’s just tough to find a whole lot of smart money right now,” says Jan Freitag, senior vice president of Smith Travel Research, during the opening panel discussion focusing on statistical trends.
“On the demand side, I think that we all agree life is pretty good,” added Freitag. “Business travel is back, leisure travel is back. Group travel is good-ish. So, I think the supply-demand fundamentals are very well understood, and they’re really good.”
— Matt Valley