Summer 2014 Forecast Preview

2014 is shaping up to be a great year and there is no reason the momentum will slow next year or anytime soon. Sure, there is always some type of uncertainty regarding expenses, e.g. the impact of minimum wage bills and the living wage movement on labor costs or healthcare costs and the impact of Obamacare, but in the short term it is mostly good news. And there is always the possibility that an “event” of some sort could dramatically disrupt things, but here is what is going on in key areas of the hotel industry.

Travel and tourism is the world’s biggest industry, representing 9 percent of the global gross domestic product, or 260 million jobs, according to Hilton CEO Chris Nassetta during his remarks that kicked off the ALIS Conference earlier this year.  Nassetta went on to say that more than 1 billion people traveled outside of their country’s borders during 2012, doubling the same metric from 20 years prior. And even more astounding, “it will (double) again in the next 20 years,” Nassetta said.

For the tourism industry in the United States to take advantage of this worldwide trend, Nassetta’s solutions were:

  1. Support effective marketing efforts, specifically Brand USA
  2. Reduce visa wait times
  3. Expand the visa waiver program
  4. Modernize the visa application process
  5. Make borders more welcoming

And while the ALIS Conference had a positive vibe, it was nothing compared to the Meet the Money Conference!

At this year’s Meet the Money Conference held in LA by JMBM at the beginning of May, STR’s Vail Brown imparted some impressive statistics:

  • Several revenue records were set in 2013
  • Q1 2014 RevPAR is up 6.8 percent, supply is up only 1.2 percent and demand is up 2.3 percent
  • Average rate growth in gateway cities is particularly strong with San Francisco up 12.3 percent in Q1

Mark Woodworth of PKF also shared equally striking data:

  • Demand has recovered in 45 of the 50 top markets
  • Occupancy levels are up 4 years in a row
  • Average rates are 95 percent back to where they were at the peak in 2007

Given our recent economic history including the fiscal cliff and S&P downgrade of the U.S. economy, this is very good news. While gross domestic product was disappointing at 1 percent in Q1, it turned up in March and is forecast to continue an upward trend throughout 2014.

Greg Hartmann of Jones Lang LaSalle indicated that private REITs, foreign investors and public markets are the primary driving forces of investment in today’s hotel industry. He focused his remarks on aggressive lenders and buyers from China and South Korea. 2010 started the uptick in RevPAR and we have seen a “great debt recovery” recently.

Both Hartmann and Alan Reay of Atlas Hospitality Group talked about deal flow. It is clear from their remarks that hotel real estate investors unleashed capital and aggressively bid on assets throughout 2013. Both Hartmann and Reay were of the belief that transaction activity would improve this year.

According to Steven Rushmore, Jr. of HVS, values will peak in 2015 and interest rates will slowly increase as this economic recovery continues. New supply will become a factor as Steve’s work doing feasibility studies gradually has recovered. His most shocking report was on the “real” cost of franchising that put costs at nearly 18 percent of revenues for some franchisors.

Meet the Money Water Cooler Talk (actually it was at the bar)

Supply growth is beginning to be a concern and will drive down ADR growth if not held in check. None of us had answers as to how to hold it in check and most of us were considering building more hotels! The debt markets are starting to get a bit frothy, with incredibly low interest rates, high loan to values and very aggressive and competitive lenders.

While the fundamentals are good for now, there are some headwinds like labor costs and health care costs as mentioned above. Other concerns are rate transparency, pricing power in the hands of fewer people due to consolidation, brand creep and higher interest rates.

The Lodging Industry Investment Council’s (LIIC) Mike Cahill gave his David Letterman-style Top 10 Trends List:

10. Obamacare
9.  True group demand including meeting space
8.  Quality of hotels for sale is down, quantity is up
7.  Time to develop, better to build than buy
6.  Marriott has the best rewards program, well above HHonors at 52 percent to 13 percent
5.  Hotel lenders back and aggressive
4.  Volume of transactions will increase
3.  Equity rates headed south
2.  Values going up
1.  5th to 6th inning, most like 2005/6 (compared to a baseball game)

Having said that, PhoCusWright just came out with their report on 2013 and led with this positive statement:

“Millions of U.S. adults who skipped out on vacations over the past few years finally felt confident enough to book in 2013,” says PhoCusWright senior analyst, Marcello Gasdia. “This is a much welcomed improvement for the U.S. leisure travel market. There is no doubt that travelers are feeling more confident these days. Many are already planning expensive vacation schedules for 2014.”

Baby Boomers drove the recent improvement in leisure travel incidence. Nearly half of this age group went missing from the travel marketplace in the years following the recession. But this hard hit demographic is quickly regaining their footing, with roughly 60 percent taking leisure trips this past year.

The HotelGuru’s Analysis

Based on all of this positive data and other industry metrics that have come out recently, here is my analysis of the situation.


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