For the past several years we have put out our forecast for 2016 at the beginning of Q4 as we’ve had time to analyze the data and hear from industry experts at The Lodging Conference.  This year’s conference is next week and while there will be a lot of valuable data, 2015 was such a strong year that the indicators for 2016 give us enough confidence to already forecast for next year.  Rest assured, I’ll pepper my future articles with the insights gleaned from The Lodging Conference, one of our industry’s most useful and successful events I might add, but waiting will only delay your planning for a successful 2016.

According to UBS, a strong foundation for forecasting U.S. lodging revenue growth includes change in unemployment, capacity utilization and structural spending. Capacity utilization has seen some slowdown in Q2 2015 at around 77.8 percent vs. 78.5 percent in Q1, driven primarily by slower manufacturing, perhaps due in part to the strong dollar.

While unemployment rates continued steady declines from 5.6 percent in Q1 to 5.4 percent in Q2, UBS estimates that structural spending will improve from levels that plummeted in Q1, largely driven by oil prices.

We believe that the original 3-4 percent GDP growth forecast for 2015 by our favorite economist, Bernard Baumohl of the Economic Outlook Group, might have been a bit high.  However, we expect to see a very strong finish to the year and a record financial performance for the lodging industry in 2016.  In fact, we believe that the next twelve months will be the best twelve month period the hospitality industry has ever experienced.

Diving Into the Details

While Q2 2015 decelerated somewhat from Q1 and tough comps impacted August of 2015 (Labor Day was in September this year), we feel that average rate growth will fuel more net income.

U.S industry RevPAR ended Q2 2015 up 6.5 percent, decelerating from Q1 growth of 8 percent. Q3 is finishing at a pace below that of Q2 but the growth is still strong against historic levels. Having said that, the next 12 months are going to be very exciting because the RevPAR growth is going to come from average rates. PKF is still forecasting huge gains in net operating income, interest rates remain low, and gas prices are low enough to stimulate leisure demand.  As a result, there are signs that we could see extra innings in the baseball analogy of the economy we like to use.

According to STR, new supply will increase from 1.3 percent in 2015 to 1.4 percent in 2016, demand will drop from 2.6 percent in 2015 to 2.2 percent in 2016, occupancy growth will drop from growth of 1.4 percent to 0.8 percent and average rates will continue to grow at 5 percent. This will grow RevPAR from 6.5 percent in 2015 to just under 6 percent in 2016.

According to TravelClick, for the second quarter of 2015, overall committed occupancy was up 1.1 percent in the top 25 markets.  Committed occupancy for the group segments is up 0.6 percent and the transient segment is up 1.4 percent compared to a year ago and ADR for the first quarter is up 4.4 percent over the same time last year.  All of these metrics point to terrific growth in the months ahead.

Additionally, TravelClick reports that the hotel industry outlook for the top 25 North American markets is showing an increase of 2.5 percent in committed occupancy for the period June 2015 – May 2016.  This is based on group commitments and individual reservations on the books as of May 28, 2015 compared to the same time last year. They add that:

• The group segment is up 1.9 percent in contracted room nights.
• Pacing for new group business added over the last month is down 2.0 percent over the comparable period last year.
• Transient room nights booked are up 3.9 percent compared to the same time last year.
• Average daily rate (ADR) is up 4.9 percent based on reservations currently on the books for 2015.

Selected Markets Data

We own and operate hotels in a number of markets with strong concentrations in California and Arizona so we’ll add some localized data for those states.

According to STR, California enjoyed strong growth in both occupancy and rate performance. San Diego will finish 2015 at just over 75 percent occupancy and ADR of over $150 with nearly 9 percent RevPAR growth. We forecast that this market will surpass 76 percent occupancy in 2016 and ADR of $160 demonstrating ADR growth of 6 percent, occupancy growth of one percent and RevPAR growth of 7 percent. As an aside, major California cities are on fire with enormous RevPAR growth in 2015 to date for Anaheim at 9.1 percent, Los Angeles at 8.6 percent and San Francisco at 10.8 percent.

Arizona also enjoyed strong growth in all metrics. Phoenix came off the Super Bowl at the beginning of February and has continued a strong run with STR projecting rate growth of almost 10 percent (RevPAR of 16 percent!) and 7 percent respectively for 2015 and 2016. Other double digit RevPAR growth cities throughout the U.S. are Atlanta, Boston, Chicago, Nashville, Orlando, Seattle and Tampa.

Trends Impacting Performance

Every December we put out our most popular and anticipated article, our Top 10 Trends for the coming year.  Fret not, we will issue our Top 10 Trends for 2016 this December as well but below is a preview of a few of those trends that will impact performance.

The MMGY Global “Portrait of American Travelers 2015” reports that 70 percent of families say children have a great influence on their trips.  Changing family dynamics and multi-generation travel is increasingly popular and impacting guest booking and travel plans.  Accommodating and anticipating the needs of multi-generational travel will allow your property to capture this growing market.

Although this one has been around for a few years, the impact of mobile cannot be understated.  Cyril Ranque of Expedia proclaimed at the NYU Conference this summer that, “out of the 145 million people who booked travel in the U.S. last year, 90 percent of them searched for travel on mobile. 25 percent of all our transactions are mobile and in China, well over 50 percent is mobile.”  The ever evolving dynamics of the mobile experience are crucial because your hotel needs to be easy to book the way guests are searching for it.  If you’re not easy to do business with then you are not going to capture the bookings.

 Soft brands will have a significant impact on current independent hotels who will be able to leverage the combination of independence and brand appeal.  The major brands have been heavily marketing their lifestyle brands but the soft brands seemingly provide the best of both worlds, access to a GDS and brand-specific loyalty guests but independence in operational standards and hotel design.

 The lack of stringent brand standards is a significant attribute to attract Millennials and other groups increasingly looking for a more independent vibe and feel when booking hotels.

Translating Strong Performance to Higher Valuations

At the end of the day, whether you are an owner, operator or both, net income and the value of your hotel is a key indicator of the market strength and your team’s performance. Capitalization rates (cap rates) that determine value by providing an estimated return that a buyer will receive on your current net income are the best barometer for determining value. Today, these rates range from 5 to 11 and the average is 8. This means an investor would receive a first year return of 8 percent on a cap rate of 8. For illustration for those who are not comfortable with this part of the industry, a net income of $1M divided by a cap rate of 8 would equal a $12.5M value. On the other hand, that same hotel net income at a 7 cap would be $14.29M.

Boutique hotels, resorts and top tier metropolitan areas are lower than average, meaning that your price would be higher (lower cap rate means higher value). Now is still a great time to invest in certain markets (make sure you have strong team to evaluate each deal) as net operating income (NOI) increased by 12.3 percent in 2014, it is expected to rise another 14.2 percent in 2015 and another 12.9 percent in 2016 according to PKF. Values have already surpassed the previous highs of 2006 and 2007.  Further contributing to strong valuations are that supply and demand will be in equilibrium and interest rates will only increase marginally, possibly by the end of the year but more likely in Q1 2016.

The Coming Year Will Be Amazing

2016 is shaping up to be the strongest year ever for our industry and that is saying a lot given the strong performance we experienced this year.  However, the stars are aligned and it is crucial that your hotel is set up for success.  Get those well-thought out and actionable business plans done now so you can finalize your budgets and hit the ground running on January 1^st.  Achieving the expected stellar results will not be a walk in the park but looking back this time next year, you will be amazed and what you have achieved from an operations and valuation standpoint.  Go get ‘em!