Hotel fundamentals strong, why isn't construction?

 

Hotels are reaping the benefits from low supply.

There's an interesting disconnect going on in the hotel industry at the current time. While industry fundamentals are creeping steadily back to their heady days subsequent to the 'Great Recession,' new hotel construction is not along for the ride.

As The Dallas Morning News points out: "apartment building is booming, warehouse construction is picking up steam, office building activity is rebounding, but what about hotels? Well, not so much."

Even though hotel occupancy levels and rates have grown significantly in the last couple of years, there's very little hotel development going on in most U.S. markets, according to Mark Woodworth with PKF Hospitality Research, and as reported by The Dallas Morning News.

"There is just not a lot of construction going on," Woodworth told journalists meeting in Atlanta Thursday at a National Association of Real Estate Editor’s conference.

Just look at the numbers: new hotel supply in the U.S. will be about 0.8 percent this year and will grow only 1 percent in 2014.

Meanwhile, hotel profits are skyrocketing. "There is a lot of optimism in the industry," Woodworth said. "Next year should one of the greatest years we have seen in quite some time."

Already, average revenue per available room growth is growing. "Rate growth and occupancy levels are going to be well above their long term averages," he said. "We have well above average profit increases pretty much out as far as we can see."

Still, investors and developers aren't ramping up construction and banks are still skittish to lend money for new builds. "It is this notion of volatility," Woodworth said. "Hotels have 24-hour leases.

"The investment community is really heavily discounting the next six months in the hotel business."

Meanwhile, the industry is continuing to show signs of recovery, with occupancy levels at higher-priced hotels picking up, according to a new analysis by advisory firm PwC, and as reported by USA Today. The firm expects RevPAR to increase 5.9 percent this year. In 2014, RevPAR is predicted to increase 6.2 percent due to the improving economy and since demand and supply is still out of whack, with demand clearly overshadowing supply, as displayed above. Demand is growing as both leisure and business travel pick up.

But there are still challenges ahead and any unforseen events could knock the gravy train off its rails. For now, it's smooth trekking.

"Recent performance of the lodging sector has exceeded industry expectations, even as fiscal challenges encourage near-term caution," said Scott Berman, principal and U.S. industry leader of hospitality and leisure at PwC. "Hotels in higher-priced segments are achieving occupancy levels above the prior peak, and looking ahead, the foundation is in place for solid rate gains as travel demand grows and hotel operators adjust strategies accordingly."

Demand for lodging should increase by 2.2% in 2013, PwC estimated. Coupled with anemic supply, it should boost occupancy levels to 62.2 percent, the highest level since 2007.

This news should spur hotelier to raise rates. PwC expects RevPAR to increase 6.2 percent in 2014.
 

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