Lodging Sector Update
Hotel investment settles in for a long stay.
lodging real estate cycle enters its second year of expansion, the hotel
industry is booming. Guest room occupancy finished 2014 at 64.4 percent, while
revenue per room posted an astounding 9.2 percent year-over-year increase,
according to Smith Travel Research. Average daily rate and revenue per
available room are both at record highs, while hotel occupancy and room revenue
reached their highest levels in more than 15 years.
guest room demand increased 4.5 percent YOY, while the growth rate for new
supply was less than 1 percent. Lodging Econometrics analysts noted that all 25
top markets showed occupancy, ADR, and RevPar rates up over 2013. Demand growth
exceeded supply growth in all 25 markets and outpaced supply by more than 2.5
percentage points in 20 of those markets. Just three markets registered supply
growth greater than 2 percent: Denver, Nashville, Tenn., and New York.
continued uptrending of these operating metrics will soon quicken the pace of
new hotel construction and will also increase transaction volume and further
escalate selling prices. Improving metrics will encourage real estate
investment into the maturity phase of the cycle, anticipated to occur toward
the end of the decade.
Poised to Break Out
hotel construction pipeline struck bottom in 2011 with 2,753 projects and
334,712 rooms. In 2014, the pipeline experienced its first year of significant
growth, rising to 3,645 projects and 460,551 rooms, a substantial 20 percent
YOY growth rate that freed the pipeline from what had been a two-year bottoming
formation. (See Table 1.)
other real estate sectors, such as office, multifamily, and industrial, hotel
development has been slower to react to the improving economy. For instance,
only two major markets have more than 100 projects in their pipelines: New York
with 188 projects and the sprawling Houston market with 148 projects. In
comparison, five markets had more than 100 projects under development at the
previous cycle’s peak
is currently concentrated in select-service, lifestyle, and mid-market
properties. These include Marriott’s Courtyard, Residence Inn, Spring Hill Suites, Town Place Suites,
and Fairfield Inn; Hilton’s Garden Inn, Hampton Inn & Suites, Home2 Suites, and Homewood
Suites; IHGs’ Holiday
Inn and Holiday Inn Express; Starwood’s Aloft; and Best Western’s Plus.
economic and financing environment near perfect, development of these property
types is expected to gather even greater speed. The economy is being driven by
strong business activity, solid job creation, falling unemployment, lower
energy prices, mild inflation, and improved consumer confidence. Interest rates
are low. Construction and takeout financing are readily available at attractive
metrics that will signal a maturing pipeline will likely be similar to what
occurred in the previous real estate cycle: a preponderance of new project
announcements for large luxury and big-box meeting-oriented hotels located in
major downtown and suburban locations, as well as a flood of large hotels to be
built in major resort areas. Shortly thereafter, projects exiting the
construction pipeline as new hotel openings will push annual supply growth
above 3 percent, providing a natural brake to the development cycle later in
Volume Still Sluggish
volume bottomed in 2009 with 528 reported transactions and property transfers,
marking a low for the previous cycle. In 2014, 1,292 hotels transacted or
transferred ownership. Over the last five years, total transaction volume has
ranged between 1,261 and 1,457 hotels, a narrow range far distant from the
3,218 transactions and transfers reported in 2007. (See Table 2.)
there were 799 single-asset transactions and 481 hotels changing ownership in
portfolio sales. A mere 12 hotels were recorded as part of merger activity,
indicating that any significant industrywide consolidation of companies and
brands may still be a few years away.
portfolio transactions consist of select-service hotels — the favored hotel
type for private equity groups that assemble portfolios. Equity group buyers
will often reposition certain hotels further up market with a new brand to
extend their product life cycle, while other hotels undergo a less
comprehensive renovation program to bring them current with the existing brand’s standards. Portfolios are generally sold
after a five- to seven-year holding period, often to other equity groups.
Frequently the sale proceeds are quickly reinvested to assemble new portfolios,
a particularly opportune strategy today since there are still a number of
highly profitable years remaining before the current cycle ends.
estate investment trusts and high net-worth investors were significant
purchasers of large luxury and upper-upscale hotels that come to market
infrequently. When combined with private equity groups, these investor groups
collectively created a shift in 2014’s transaction mix. For the first time in this cycle, more than 50
percent of all hotel transactions occurred in luxury, upper-upscale, and
upscale chain properties.
lodging industry investment in 2014 was $30.8 billion.
1,292 hotels that were transacted, 935 reported a selling price into the public
domain and had an average selling price of $156,002 per room, up a dramatic
20.6 percent YOY. (See Table 3.)
healthy increase in selling prices is due to low interest rates and the
availability of attractive financing terms. Prices are further driven by the
intense competition for large, well-located high-end single assets and upscale
portfolio opportunities. LE foresees prices continuing to rise for the next few
years as financing is likely to remain accommodative and competition for these
and Seller Activity
hotels with a reported selling price, investment totaled $22 billion. Equity
funds were the most active investors in 2014 purchasing $7.4 billion in hotels,
most of which were part of portfolios. (See Table 4.)
traded REITs were the next biggest acquirers and invested $6.4 billion,
primarily purchasing high-profile single assets divested by privately held
hotel companies and individual owners. Privately held hotel companies were also
significant buyers, investing $4.4 billion, mostly in single assets and smaller
biggest sellers in 2014 were privately held hotel companies and equity funds.
Buy- and sell-side dollar totals for equity funds are usually in approximate
balance because they frequently trade their portfolio to one another. Minor
variances in the totals can typically be attributed to when funds either add or
prune hotels from existing portfolios.
second year of the cycle’s
expansion phase begins, the industry finds itself entering a significant sweet
spot. The economy is solid, hotel operating metrics are at or near record
highs, and hotel profitability is very strong. Interest rates are low and
funding is readily available. The foreseeable future is very bright.
developers, rapidly increasing selling prices have already made it cheaper to
build hotels than to buy. Soon new project announcements entering the
construction pipeline will quicken and, two to three years later, exit the
pipeline as new hotel openings. That surge of new supply, coupled with a
slowing economy and tapering hotel performance, will signal the end of this
real estate cycle. It will be preceded by a flurry of Wall Street activity as
the industry consolidates companies and brands.
slow start to the recovery, there is mounting optimism that great opportunity
is ahead for the hotel industry. A solid four to five year run up is possible,
barring any unforeseen exogenous event.
H. Ford is chairman, CEO, and founder of Lodging Econometrics, National Hotel
Realty, and New England Hotel Realty. Contact him at www.lodgingeconometrics.com.