ATLANTA — The combination of a record number of international travelers to the United States, healthy growth in business investment and consumer spending and limited new room supply in most major markets means it’s a great time to be a hotel owner or operator. Mark Woodworth, president of PKF Hospitality Research, delivered the upbeat message about the state of the lodging industry to the National Association of Real Estate Editors (NAREE) on Thursday during its 47th annual journalism conference at the Hilton Atlanta.
The projected number of international visitors to the U.S. in 2013 is 69.2 million, up from 56 million in 2007, according to the International Trade Administration. The number of international visitors is expected to grow to 80.5 million in 2017. “That’s good news and particularly relevant as we look at some key gateway cities around the U.S.,” says Woodworth.
Meanwhile, Moody’s Analytics is forecasting attractive gains in business investment and consumer spending through the remainder of 2013 and 2014, which gives PKF confidence that outlook for the U.S. lodging industry “remains very, very solid,” says Woodworth.
PKF forecasts the average annual net increase in room supply to be 1.9 percent through 2017 in the top 50 major metros, with most markets below that level. One notable exception is the Big Apple, where the annual net increase in supply through 2017 is projected to be 4.7 percent. “New York City is absolutely going through a construction boom right now, particularly as it relates to hotels, and we’re watching that very closely, but that’s another market that we feel really good about.”
The fly in the ointment is group travel, which still hasn’t fully recovered, says Woodworth. Before the Great Recession, strong group demand for meeting space enabled a hotel manager to have a meaningful amount of hotel room nights sold six to 12 months in advance. That’s not the case today.
“Right now, for meeting planners, scarcity is not an issue. That meeting planner pretty much knows I can get what I want where I want, and probably get it at a pretty good price. We think that is slowly beginning to dissipate, but we really won’t see that kick in until sometime next year,” says Woodworth.
Still, PKF predicts hotel demand to increase 2.6 percent this year and 3.3 percent in 2013. That compares favorably with new supply, which is projected to rise at a rate of 0.8 percent this year and 1 percent in 2014, below the long-term average of two percent (see table below). Meanwhile, PKF forecasts revenue per available room (RevPAR) to rise 6.1 percent this year and 7.7 percent in 2014. The forecast for growth in the average daily rate (ADR) is a little less robust. Specifically, ADR is expected to grow 4.3 percent this year and 5.4 percent in 2014.
Although hotels have achieved the strongest income growth of any of the major property types during the past three years based on quarterly data from the National Council of Real Estate Investment Fiduciaries, the industry still lags the other major property sectors when it comes to price appreciation. “One might ask, ‘ Why are hotels, from an investment perspective, being penalized?’ It is this notion of volatility,” explains Woodworth. “The income yesterday was really good, but what’s going to happen tomorrow?”
Hotels have 24-hour leases, remarks Woodworth, and with that short lease term comes the uncertainty of whether the good times will persist. “The investment community is heavily discounting the next six months in the hotel business. Even though everything looks solid, there is a lot of uncertainty around that.”
Some of that uncertainty surrounds the direction of U.S. economic policy.
— Matt Valley