As global demand surges, hotel prices to follow suit

For owners and investors of hotel assets, there is no better time to have equity positions in the global hotel industry. That's because of simple economics: demand for hotels continues to outpace supply.

Now, that will change over the next three years, but, for now, and certainly carrying into next year, hotels are in the driving seat when it comes to pricing. And as new data from the Global Business Travel Association relate, global hotel rates are set to rise, a trend that should flow through to the bottom line.

Globally, according to the GBTA, 2016 will show an increase in hotel prices because demand is overtaking supply in every major global region.

According to the data gathered, Asia Pacific will see hotel prices rise by 3 percent, led by Singapore, Japan and Australia.

Meanwhile, in EMEA, hotel prices will see a moderate increase of 1.8 percent, although many European countries will experience price increases in local currency due to exchange rates with the U.S. dollar. Prices in Russia will rise significantly to offset the impacts of the drop in oil prices and sanctions on its economy.

In Latin America, prices are forecasted to rise 3.7 percent due to high inflation in some nations, particularly Venezuela and Brazil.

North America High
In North America, high demand will increase rates by 4.3 percent, driven by economic activity in the San Francisco Bay Area, Los Angeles and other major U.S. cities.

The U.S. hotel business is booming, making it an attractive investment for overseas investors, particularly from Asia, where countries such as China and South Korea continue to target mainly high-end hotel assets. 

There's reason why. As PKF's Mark Woodworth told GlobeSt.com, 2014 was another year of consistent, strong performance. According to STR, demand grew at five-times the level of supply, and the national occupancy reached 64.4 percent, a level that was last achieved back in 1996. "Growing scarcity on a greater number of nights during the year enabled hotel managers to achieve a 4.5-percent increase in average daily rate and a lift in RevPAR of 8.2 percent," Woodworth told GlobeSt.com.

So, what does the future hold? Woodworth forecasts the trend to continue through 2016. "This six-year period (2011-2016) of continuous double-digit gains on the bottom line will be the longest such streak for the nation’s hotels since PKF began tracking the industry in 1937," he said.

According to STR, lodging demand grew by 3.4 percent through May 2015 while supply expanded at a 1-percent annual rate. As a result, occupancies jumped by 3.4 percent to a 63.6-percent level, room rates increased by 4.7 percent and RevPAR grew by another 7.2 percent during the initial five months of the year.

Further, he pointed to a smaller pipeline that is allowing for heightened demand and better pricing opportunities. "The development pipeline is one-third smaller than it was at this time in the previous cycle, thus indicating that the threat of too much new construction too soon is not a concern this time around in the vast majority of domestic markets," he said.

Up in the Air
Hotel rates aren't the only thing going up, according to the GBTA. Their research identified six hot spots—India, China, Colombia, Mexico, Singapore and Australia—where increased business travel demand is driving significant air price increases.

"Business travel is a leading indicator of global economic activity," said Joseph Bates, GBTA Foundation VP of research. "The top-line pricing outlook for air, hotel and ground in 2016 is surprisingly stable. But when you dig deeper, the data reveal global hot spots where demand is driving air travel price increases. For 2016, India, China, Colombia, Mexico, Singapore and Australia are projected to top the list."

Findings come from the 2016 Global Travel Price Outlook, research from the GBTA Foundation, the education and research arm of the GBTA, and travel management company Carlson Wagonlit Travel.