Let the Good Times Begin

At hotelguru.com, we look at indicators beyond the critical Smith Travel Research (STR) data. We have developed an algorithm that accounts for booking pace, STR trends, economic indicators and much more. Despite the uncertainty in the jobs market, the double-dip in housing, a lack of consumer confidence, oil prices and sluggish gross domestic product growth, we are bullish on lodging going forward.

In the United States, Smith Travel Research data from the third quarter reflects this positive outlook. When compared to Q3 2010, revenue per available room (RevPAR) in the United States improved from $63.40 to $68.44, representing a 7.9 percent increase. That came from a 4.0 percent increase in occupancy to 66.5 percent, and a 3.8 percent increase in ADR to $102.96.

I just read a blog by my esteemed colleague and friend Jim Butler, head of JMBM’s Global Hospitality Practice who attended the recent North American Development Conference and it was great! He quoted another esteemed colleague and friend, Robert Mandelbaum, head researcher at PKF Consulting and I no longer feel alone in pronouncing the end of this ugly three year period in our industry. So in the coming paragraphs, I’ll quote some industry pundits and provide my own analysis as well.

We have entered the second inning of this new ball game. [pullquote]The “Great Recession” followed by the “Great Hangover” has ended[/pullquote] and occupancy and rate growth have both moved steadily upward. The hotel industry continues to show signs of year-over-year growth relative to increased corporate demand, resulting in improved hotel occupancy and steady leisure demand which has firmed up rates. Average rate increases are expected to be 5 percent in primary markets in the United States according to multiple sources, despite the resistance from corporate users during the “request for proposal” process this year.

For the next 12 months, committed occupancy on the books is up 4.8 percent year-over-year, average daily rate is up 4 percent, and revenue per available room is tracking ahead by 6.5 percent, according to TravelClick’s October 2011 North American Hospitality Review. The group and business sectors are particularly strong, according to Tim Hart, Travelclick’s CEO.

“That pace number, especially in the group segment, was up considerably through the course of September coming into October, which really bodes well for the group base that’s getting added into 2012,” he said.

Indeed, group pace—or the increase in group bookings made during the past 30 days—was up 18.7 percent for room nights booked for the first quarter of 2012. Total pace, which includes group, business and transient bookings, was up 15.3 percent for the first quarter of 2012.

“Corporate travel experienced moderate growth in 2011 as companies continued to cautiously reinvest in their travel programs,” said Chris Vukelich, Vice President Supplier Relations, Egencia Americas. “Accordingly, suppliers will likely implement moderate price increases in 2012.”

ADRs are forecast to be up overall in North America, with the largest increases in San Francisco (up 15 percent), Boston (up 10 percent) and Minneapolis (up 9 percent). Upward pricing pressure can be attributed to the trend that new supply growth in the U.S. remains slow while demand has been making a recovery toward 2007 levels.

Hotel Values

What is the impact of these improved revenues? Values go up as net income increases. Most owners have done a good job of cutting expenses in this weak economic environment. This alone has increased hotel values in 2011. Going forward, I believe we can look at double-digit per annum growth in values over the next four years. That means that a hotel that is currently valued at $150,000 per room will be worth over $220,000 by 2015. Why? Because average rate, by and large drops to the bottom line and that is where much of the growth will come from.

Naturally, there are assumptions that must be made to lay out an “apples to apples” analysis of when to acquire or exit a hotel asset. Capitalization rates bottomed out this year when Real Estate Investment Trusts (REITs) went crazy spending money on a 5 cap basis. Today, if we assume stabilized “cap” rates of say 8 percent on trailing 12 net income over the next four years and stabilized interest rates of say 7 percent, I believe these value improvements will prove real.

What this means is that hotel owners should hold their assets if they can and buyers should aggressively purchase now. Naturally, there are always caveats like major oil crises, interest rate spikes, terrorism and natural disasters. But this industry has largely been predictive in its troughs and peaks. And we are clearly coming off the trough of the recession and hangover. I should mention one more caveat…not all markets are created equal. What might work in New York, San Francisco, Los Angeles and Chicago might not work in Detroit or Phoenix.

ADR growth

TravelClick expects steady improvement in ADR to fuel RevPAR growth in the high single digits for the rest of the fourth quarter, and possibly into the 10 percent range by the first quarter of 2012, Hart said.

To get there, however, he said hoteliers must act with confidence. We would certainly agree with Hart on that point. It is clear to us as we operate hotels in California and Colorado that hoteliers are frightened at the prospects of raising rates, fearing that guests will move to a competitor’s hotels.

“Despite your inclinations to not be confident based on everything that’s happening around you in the macro environment and the news environment, act on the numbers that these represent and go ahead and enter 2012 with confidence,” Hart said.

According to Pegasus, booking lead times continue to gradually lengthen. This bodes well for hoteliers as guests are willing to make plans further out, allowing us to forecast more accurately. While the increase was only from 15 days to 16 days out, it is in the right direction! Pegasus also believes that GDS channel results show a powerful recovery from the corporate front, with ADR growth at 5 percent this year. Their Summer 2011 Pegasus View states, “reservation volume has been recovering remarkably as corporations have been experiencing

increased earnings and reinstating travel to drive more profit to the bottom line. ADR has more

progress to make, but has gained considerable ground.”

Steve Rushmore, one of the original hotel forecasting gurus (I am honored to know the three best in the industry…Randy Smith and Peter Yesawich are the others) observes (and I’ll paraphrase) in his October 2011 blog, “hotel demand continues to grow, construction financing is scarce, hotel values are increasing, now is the time to buy and don’t sell until 2012-2013. I couldn’t agree more!

So that nobody thinks the trends are reversing today, U.S. revenue per available room growth (REVPAR) was up +8.6 percent for the week ended October 22, 2011 with the trailing 28 day REVPAR (a good indicator for October) up 6.1 percent. The bottom line is, “hang in there, baby and let the good times begin!”

Bob

Robert A. Rauch, CHA