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| Pinnacle Advisory Group’s Rachel Roginsky (left) and HVS’ Anne Lloyd-Jones smile as panelists are introduced during HELP’s opening general session. |
BOSTON—The U.S. hotel industry will continue building on the momentum gained during the past several months, but the prospect of weakening demand looms, panelists said Wednesday during the inaugural Hotel Equity and Lender Perspectives conference in Boston.
The recent uptick in leading economic indicators bodes well for the immediate future of the industry, Mark Woodworth, president of PKF Hospitality Research, said during the opening general session. The data shows demand is likely to show growth in hotel demand in the late third quarter this year and stretching into early 2013. Year-to-date through March, demand is up 4.1%, according to data from STR, parent company of HotelNewsNow.com.
Revenue per available room and average daily rate was up 7.9% and 4% year-to-date through March, according to STR.
Rachel Roginsky, principal with Pinnacle Advisory Group, said the upward trend should continue. “So far so good is our theme,” she said.
Adding to the positive outlook for hotels is the low supply story. The number of active development pipeline rooms in March was down 9.7%, according to STR.
While some development projects have made headlines recently, David Loeb, senior research analyst with Robert W. Baird & Company, expects supply to remain muted. “Press releases are essentially warning shots,” he said. “Don’t build your hotel here. Press releases are not breaking ground. … I think (pipeline growth) will be pretty tame.”
Further, Loeb said the Baird/STR Hotel Stock Index has shown that hotel stocks have outperformed the market.
With all the things the hotel sector has in its favor, Loeb said he’s most surprised by the reluctance of revenue managers to raise rate more than they have.
“Those of you on the rate-setting side of the business, you guys are wimps,” he said. “You can do better.”
Long-term outlook
The steam behind the hotel industry’s recovery won’t last forever, and one panelist said the long-term outlook shows signs of weakness.
Anne Lloyd-Jones, managing director, HVS Global Hospitality Services, said demand will weaken through 2016. HVS data shows demand slowing to 1% growth in 2016, down from a forecast of 3% this year. HVS also forecast ADR growth to slow to 3% in 2016, down from an expected 5.5% in 2013.
STR forecasts demand growth of 2% during 2012, slowing to 1.8% growth during 2013.
The sentiment from the panelists was one of optimism, however.
“There are reasons to be concerned, and there are reasons to be positive,” Woodworth said. “The positives outweigh the negatives.”
Transactions outlook
As the sector’s performance has improved, the hotel transactions market also has heated up, the panelists said. For the 15-month period through March, Woodworth said a total 225 hotel deals of more than $10 million were consummated. These deals, at an average price per room of $210,000, represented a total volume of more than $12 billion.
Nearly a quarter of these deals took place in the top coastal gateway markets of New York; San Diego; San Francisco; Miami Beach, Florida; and Washington, D.C.
Also, Loeb said hotels owned by real-estate investment trusts, which have increased their acquisition activity of late, represent approximately 70% of U.S. hotel rooms.
“You cannot imagine the voracious appetite of the public companies to buy real estate,” he said.
There is “tremendous upside” for hotel deals, Lloyd-Jones said. An increasing amount of financing—and the low cost of that financing—is contributing to a climate conducive for hotel transactions.
Potential challenges
As rosy as the hotel sector appears, there are potential roadblocks, the panelists said. They include the political climate and economic volatility.
Woodworth sees the biggest threat to U.S. hotels being in the form of federal policies, including health care reform and the expiration of tax cuts enacted by former President George W. Bush.
As for economic issues, the panelists largely downplayed the effect rising gas prices might have on the hotel sector.
“People are over the shock of $4 a gallon,” Lloyd-Jones said.
Loeb said travelers feel they are entitled to a vacation and won’t necessarily let high gas prices prevent them from hitting the road.
Future IPOs?
The panelists also delved into other areas. Panel moderator Jeff Higley, VP of digital media and communications with HotelNewsNow.com, STR and STR Global, asked Loeb when Hilton Worldwide will go public.
Hilton’s initial public offering could occur soon, perhaps next year, Loeb said, adding the IPO could see Hilton broken up into multiple, separate public companies.
“We love Hilton so much, why not have two of them?” Loeb asked.
Also, Loeb said a La Quinta IPO could be in the cards, too, but would likely happen after Hilton goes public. La Quinta has debt issues to resolve first, he said.
