All signs point to healthy three-year stretch

What do the hotel industry and Led Zeppelin have in common? Not a whole lot, but to borrow a lyric from the legendary rock band’s oeuvre: ‘Good times, bad times, you know we had our share.’

That pretty much illustrates the ebb and flow of the hotel business: one minute it’s up, the next, down. The good thing is that hoteliers are an optimistic lot, and, barring a black swan type of event, the next three years should be happy days. Should be, but as we’ve seen before, that’s not always the case. Many hoteliers bemoan the effect that sequestration and the government shutdown had, and with another debt-ceiling vote looming, well, one never knows.

But why be pessimistic? The brands sure aren’t. 

“The overall economy seems to be improving,” said Ron Burgett, EVP of lodging and brand development for Red Lion Hotels. “Manufacturing orders are rising, unemployment numbers are declining and loans are starting to percolate. These are all good signs that should translate into increased ADR, occupancy and RevPAR.”

Most prognosticators are in agreement. PKF is forecasting double-digit growth in net operating income for U.S. hotels through 2015, with strong growth in ADR being the main catalyst of bottom-line improvement.

“’The Little Engine that Could’ is an apt description for the domestic lodging industry as we head into 2014,” said Mark Woodworth, president of PFK Hospitality Research. “In spite of the constant headwinds that come with elevated levels of economic and political uncertainty, U.S. hotels continue to push ahead. All of the key industry metrics have been expanding consistently since early 2010 and these trends will persist through 2015. Passing through this milestone, and considering that new construction volumes will remain well below average for at least another two years, suggests that strong pricing power has returned to the hands of the hotel manager. In short, 2014 will remind us once again that it is a great time to be in the hotel business.”

According to the latest PwC Hospitality Directions, occupancy levels at hotels in higher-priced segments are ahead of prior peak levels, real RevPAR is above its long-term average and supply growth is slow. The federal-government shutdown disrupted lodging demand in specific markets but the broader recovery in demand continues and ADR levels are moving higher.

Moreover, PwC anticipates RevPAR to grow 5.5 percent and 5.9 percent in 2013 and 2014, respectively; and STR’s forecasts call for 5.7-percent year-over-year RevPAR growth in 2013 and 6.0 percent in 2014.

The prospective top-line growth is prompting hotel to expect big things from operators in 2014 and beyond. “Owners’ expectations will be higher than ever from a financial standpoint in 2014,” said Randy Budd, VP of sales and marketing for Radius Hospitality. “In 2013, profits became more consistent and a reality. In 2014, high profits will be expected.”

The sentiment is a shared one. “Based on our view of the economy’s continued recovery, we think owners will expect higher revenues, higher RevPAR and accelerated margin growth,” said Mark Sharkey, president of Remington Hotels.

As such, owners and operators find themselves in an enviable position for the first time in a while. “In 2013, the fundamentals were strong, supply growth was low and hotels were able to go through with transactions,” said Jim Merkel, president and CEO of Rockbridge. “This was a healthy year, and we are optimistic that those basic fundamentals will remain strong.”

PKF also forecasted that owners should benefit from increases in the value of their properties resulting from improving profits.

Other indicators of brighter times include the resurgence of debt availability for new-build projects and acquisitions. “New construction debt for hotels remains available,” said William Sipple, executive managing director of HVS Capital Corp. The same can be said for acquisition loans. “Lending for acquisitions is readily available both on a bridge basis for transitional assets, and on a fixed-rate basis for stabilized purchases,” he added.

There’s no doubt that the hotel industry is set up for good times. Not only are industry fundamentals expected to improve, the transactions market should continue to see movement as owners realize higher value in their assets. Banks are getting back to doing what banks are supposed to do: lend money. And any real threat of new supply is still a couple years off, equating into strong demand.

Yes, Led Zeppelin might not share a lot in common with the hotel industry, but hoteliers in 2014 should get a ‘Whole Lotta Love.’

Readers weigh in: Your expectations for 2014

There will continue to be low-cost capital, an increase in foreign interest, increasing development activity, demand growth in excess of supply growth and a slowing rate of growth in fundamentals, despite continued improvement.
Kevin Mallory, senior managing director and Americas practice leader, CBRE Hotels

The debt financing market will start to loosen up a bit. Asset trading has already begun in certain markets, with assets being traded then dressed up. There is a movement toward developing more luxury and lifestyle hotels, due to the difficulty for getting debt financing for hotels in other segments.
David Chase, EVP, D.F. Chase Construction

There will be a continued opening and blending of space allowing for more socially interactive lobbies. These lobbies will become the guests’ living room. Technology will be available everywhere, creating a plug-and-play environment.
Patricia Miller, VP, managing principal, corporate director of hospitality, Leo A. Daly