2013 Lodging Forecast – Time for Recovery!

The lodging market continues to outperform the economy as REVPAR (Revenue Per Available Room) growth outpaces gross domestic product by a wide margin. Employment levels continue to be weak, while growth in consumer spending is strictly of the holiday shopping variety and lags along with consumer confidence. The Fed is considering further incentives to move the U.S. economy at a better pace of growth and the Republicans and Democrats are far from avoiding the fiscal cliff. The fiscal cliff itself is not the problem. In our view, it’s the fear of the cliff that reduces consumer confidence. The truth of the matter is that gridlock has been in the nation’s capital for a long time and despite the gridlock, we are seeing growth, albeit slow growth. Moreover, we have seen strength in our hospitality metrics for two straight years!


TravelClick colleagues highlighted performance in key markets around the globe and the opportunities for hoteliers to drive rate in their Q3 2012 Hotel Industry Trends webinar last week titled “Leveraging Key Revenue Metrics and Driving Hotel Profitability.” ADR is expected to increase by 3.4 percent through the fourth quarter of this year to the third quarter of 2013. To get conversion, hoteliers need to learn how to effectively market the value they are offering to consumers, said John Hach, senior VP of product management for TravelClick.



For example, “if you lower rate and don’t tell anyone, what you have done is just lowered profitability,” Hach said. “We see hotels constantly trying to drive conversion off low rate alone. I would advise against that. The top value driver for hotels in today’s marketplace is communicating that free Wi-Fi is available,” he said. That’s “what really drives (return on investment) now,” Hach said and added that hoteliers that have a competitive edge should use it as part of the hotel’s marketing strategy.


Measuring revenue in a different way according to TravelClick

According to the TraveClick information, not all channels and guests deliver the same RevPAR. As a result, the ability to measure revenue in a different way is crucial for driving revenue. The gross-operating-profit-per-available-room metric gives a different aspect of revenue than RevPAR, according to TravelClick. GOPPAR gives hoteliers more than just the top-line revenue. Other measures include:


REVPAG – total revenue per available guest


LREVPAG – lifetime revenue per available guest


Leisure Travel Trends


Despite years of a challenging economic climate, new research points to a revival of the most meaningful driver of American vacations: the emotional connection between travel and quality of life. Leisure travelers are doing less of the things that characterized the economic hardship of recent years and are now adopting more behaviors that confirm the importance of travel in their emerging lifestyles, according to the newly released MMGY Global/Harrison Group 2012 Portrait of American Travelers, a nationally-representative survey of 2,527 U.S. households.


The in-depth, annual survey reveals that while the average number of overnight leisure trips taken during the past year has remained essentially unchanged versus the previous year, the motivations underlying these getaways are evolving. “Trading down,” “staycations” and other cost-conscious travel behaviors that emerged during the Great Recession have waned, and the new findings augur well for a boost in 2013 travel spending thanks to a renewed interest in quality experiences that Americans deem “worth it.”


The new data confirms that the U.S. travel and tourism industry is on pace for another record- setting year and, if these trends continue, international visitors could end up injecting more than $169 billion into the U.S. economy by year-end, the Commerce Department says.


Expedia Conference Data


Expedia hosts a great conference every year in Las Vegas. Half of their business is outside the US and they have rebuilt their technology platforms and doubled staff over the past 4-5 years. Plus, they innovate rapidly to adapt to the tablet, smart phone, Internet, mobile phone and all the changes taking place in our industry. The tipping point, that point in Malcolm Gladstone’s book in which consumer use hits about 10 percent was only 2.5 years for the tablet compared to over 10 years for most innovations such as the computer. Chairman Barry Diller was great in his discussions about Google, essentially saying that while he preferred that they not play in the travel space, he is comfortable that Expedia is well positioned to compete.


REVPAR currently matches 2008 but is now driven by occupancy rather than rate. We at Hotelguru.com believe this is due to a combination of rate transparency and hoteliers who blinked when the recession hit. In addition, advance purchase and same day reservations are up markedly and this drives demand at the expense of rate.


Some key facts:


81 percent of mobile guests book within 10 miles of their destination, international travel is expected to grow rapidly over next several years. 4 of 5 travelers will access their travel info via mobile devices.


Diller believes we will have a quick settlement of the fiscal cliff matter.


Lodging Economics


For the fourth quarter of 2012, overall committed occupancy is up 5.2 percent year over year for the top 25 U.S. markets and average daily rate shows growth up 3.6 percent compared with the same time last year, according to a recent TravelClick report.


While pricing has not quite returned to pre-downturn levels, current pricing trends continue to move in the right direction.


Transient travelers are making reservations earlier than they did a year ago. However, these early gains in reservation activity may not hold up all the way to the arrival period, the study shows, because it remains to be seen if this behavior is temporary and limited to resolution of the fiscal cliff and other market uncertainties.


Hotelguru.com Forecast


Updated lodging forecasts released recently by PriceWaterhouseCoopers (PwC), Smith Travel Research and PKF Consulting, all call for reductions from prior reports. The decreases average a point or so, with average forecasts calling for 6.5 percent REVPAR growth originally and now calling for 5.5 percent in 2013. We tend to believe the highest forecast, the one by PKF at 6.2 percent REVPAR growth, is the most accurate this time around.


Certainly there remain pockets of underwater hospitality assets that have yet to be refinanced. Workout specialists will solve the challenge and while some owners will lose their assets, those who have taken the right steps will likely emerge on the other side, albeit not completely unscathed.


The fundamentals of the hospitality industry are strong. Limited supply growth, steady demand growth and rising average rates, coupled with strong advance bookings and a great 2012 bode well. Uncertainty causes one to pause prior to taking on a hospitality transaction.


Another component is lack of financing. There has been a huge increase in new government regulations since the latest financial industry collapse. In addition, to our knowledge, there are no meaningful tax incentives for housing today. This will be the first real estate sector to provide some momentum for the economy. In the meantime, we are muddling along nicely, leading the economic recovery in many ways.


Additional good news is that we see values continuing to grow as profits increase. According to PKF Hospitality Research, “US hotels will enjoy significant gains in revenue through 2015.” Their 2011 sample showed an increase in aggregate profits of 12.7 percent due to a combination of rising revenues and expense controls. According to HVS, values recovered 20 percent on average in 2011.


San Diego Lodging Forecast


In San Diego, we saw a strong Q2 and Q3 driven by 5 percent and 3.3 percent demand growth respectively and 7 percent and 6 percent rate growth respectively, according to Smith Travel Research. We believe that this pattern of growth will continue and that 2013 will bring a slowing of occupancy growth to one percent as the market returns to previous highs but strong ADR growth of five percent.


While the convention center bookings are weak in 2013, (relative to other years) leisure business, stimulated by international demand and corporate business from the communications technology and biotech/biomed fields will certainly keep key submarkets in San Diego strong in 2013. These submarkets include La Jolla, Del Mar, Mission Bay/Beaches, Mission Valley and the I-15 corridor.


New pockets of activity are emerging including the Otay Mesa area, with Maquiladora traffic from Mexico and San Diego North, the swath of area from San Marcos and Escondido to Carlsbad and Oceanside and everywhere in between. California State University San Marcos, coupled with the health care industry, have driven those submarkets up dramatically.


In San Diego, we forecast occupancy to climb from 71 percent and $132, to 71.7 percent at $138 with 2014 up slightly to 72 percent but with continued 5 percent rate growth to $145. That level of activity puts occupancy and rate above historic highs of 2007 and 2008. HVS has forecasted an increase in San Diego hotel values of 33 percent from 2011 to 2015. Interestingly, it appears that hotel buyers are already paying what we believe the values will be in three years. The two most recent transactions, a boutique hotel, L’Auberge and a branded hotel, Courtyard by Marriott have sold for $640,000 and $280,000 per key respectively. Well located yes, but 3-5 percent capitalization rates seem low.


New development is scheduled as follows:



  • Marriott Autograph Collection, 78 rooms, February, Imperial Beach
  • Legoland Hotel, 250 rooms, May, Carlsbad
  • Marriott Springhill Suites, 150 rooms, December, Oceanside
  • Marriott Residence Inn, 118 suites, Carmel Valley, opening April, 2013
  • 596 total new rooms in 2013


Lots of new product is planned for Oceanside and Carlsbad, including hotels already opened in 2012 like the Hilton Carlsbad Oceanfront Resort & Spa and Hyatt Place in Vista
There are many hotels in the pipeline in San Marcos, Escondido, Carlsbad and Oceanside. We expect to see a Harrah’s Rincon expansion of 400+ rooms in the first half of 2014 and the total pipeline is more than 4,000 rooms (figure includes those not likely to be built)


Most likely number of hotel rooms to open in San Diego County:

  • – 478 in 2013
  • 1000 in 2014
  • 2000 in 2015


This increase over the next three years is 6 percent and will be largely absorbed by anticipated demand increases of two percent per year.


Wishing all of you a safe, happy and prosperous New Year!

R. A. Rauch & Associates 


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