NATHIC: Recovery by the numbers

PKF's Robert Mandelbaum

Washington, D.C.—Most of the conversation at last week’s North America Hospitality & Tourism Investment Conference centered around recovery, and more specifically, sustainable recovery, particularly in light of the European debt crisis, pending hotel construction projects and financing availability.

All in all, however, the mood was optimistic, especially when it came to the numbers.

“It really feels sustainable this time,” said JP Ford, SVP of Lodging Econometrics. He called the current transaction financing slowdown “a temporary phenomenon” and said the U.S. still is “in a period where it’s cheaper to buy than to build.”

On the building front, the new construction pipeline as measured by Lodging Econometrics still is down by more than half (see chart below) from peak levels in 2008, though Ford pointed out that beginning in late 2012, a stream of new-construction projects is predicted to enter the pipeline.

On the transactions side, individual transactions, portfolio transactions and M&A property transfers all are up significantly in Q3 2011 compared to Q3 2010 (see chart below).

“We’re seeing larger transactions with higher selling prices per room” now, compared to the 2009 low point, Ford said. 2009 saw 47 hotel transactions of properties with more than 200 rooms, and as of Q3, 2011 has had 87 transactions involving properties with more than 200 rooms.

Notably, the average selling price of properties with more than 200 rooms now is $1.68 million--not too far from the average selling price of similarly sized hotels in 2007 ($1.70 million), at the peak of transaction activity (see slide).

Robert Mandelbaum, director of research information services for PKF Hospitality Research, added more support to the numbers by pointing out the correlations between industry fundamentals and economic trends.

In particular, he pointed out the correlation—or lack therof at some points—between employment and travel.

“There’s been a very good [relationship] between the two, but in 2010 we saw declining employment, yet we had a very strong 7.5-percent growth in hotel demand,” he said.

The reason, he said? Rate. “Any psychological or economic hurdles people had in traveling, those barriers were certainly lowered when rates went down.”

Group demand is also partially attributed to employment to some extent, Mandelbaum said. “We’ve had a jobless recovery. That means corporations have more cash, and they can spend it on travel.”

Along those same lines, Mandelbaum cited PKF’s research into the correlation between unemployment and education, showing that according to U.S. Bureau of Labor Statistics and population information, unemployment rate drops drastically as education level rises. Not a surprise, Mandelbaum said, but definitely an indicator that higher educated consumers are driving demand.

PKF’s research into the correlation between GDP and lodging demand is perhaps the most telling indicator (see chart below).

“There’s been a mismatch historically between changes in GDP and changes in lodging demand,” Mandelbaum said. The company took a closer look at the components of GDP and concluded that the drivers of GDP in 2012 will be business investment and consumer/personal consumption.

“That’s good news for the hotel industry,” Mandelbaum said, “because personal consumption has a high correlation to hotel demand.”

Regarding the other driver—business investment—he pointed out that the relationships are much more local (see chart below).

“This is a local market business,” he said, referring to hotel performance related to GDP growth. “Only 17 of the 50 cities we forecast for are projected to achieve an occupancy average equal to or greater than that city’s long-run average occupancy.”

The North America Hotel & Tourism Investment Conference is produced by Questex Media Group, parent company of Hotel Management magazine, and is part of the IHIF Summit Series. Watch for continuing coverage from this year’s event this week. Click here for more information about the event.