For 2015, it’s all about striking while the iron is hot

In our annual “Future Outlook” commentary last year, we borrowed a line from Led Zeppelin: “Good times, bad times, you know we had our share.” The slightly modified lyric described the ambivalence of the hotel industry: still undecided on which way to go. That was then, this is now.

And this year, to illustrate the industry, we are pulling from another British band, The Rolling Stones, which came out with this lyric in 1981: “If you start me up I’ll never stop.”

Well, for the hotel industry, the engine is purring now, and 2015 is shaping up to be gangbusters—if all goes as planned. Even analysts—most conservative by nature—have taken to revising their initial 2015 predictions up, in light of 2014’s strong close. “Lodging demand really picked up in the third quarter of [2014] and continues to grow in the fourth quarter, a trend that seems highly likely to continue into 2015,” said PwC managing director Warren Marr, during IHMRS in New York. “And there’s still room for demand growth in 2015. We see the industry having the strongest pricing power it has had since probably 2007.”

PwC is revising its 2015 RevPAR growth forecast to 7.4 percent. STR is equally bullish, pushing its RevPAR forecast up in light of strong growth particularly in the top 25 MSAs. Which is maybe why the transactions market has been so frothy of late—and should continue to be in 2015. With new supply growth still stunted, acquisitions continue to be the choicest mode for expansion. “The last year where we saw an oversupply was 2009. Supply growth reached 3.3 percent. This year, we’re still 40 percent below that rate,” Jamie Lane, PKF senior economist, said earlier this year.

Transactions in the U.S. and globally continue to rise, and favorable conditions could accelerate hotel lending in 2015—though new-build financing is slimmer. “Debt has gotten better in terms of availability, Michael Cahill, founder and CEO of HREC, told Hotel Management earlier this year. “One of the reasons why hotel transaction volume may increase 30 to 40 percent in 2014 is the abundance of capital,” he said.

JLL predicted that global hotel transactions would increase to $50 billion in 2014, marking a five-year high. Of course, the eye-catcher in 2014 was the sale of the Waldorf Astoria in New York for a record-breaking $1.95 billion to China’s Anbang Insurance Group. Expect more from China in 2015, and more from its insurance companies, which could seek more large-scale acquisitions now that the Chinese government has become less intransigent in regard to how those companies’ balance sheets are structured.

And as Michael Yu, VP of investments at Marcus & Millichap, told Hotel Management, “The increased interest in the hotel sector and limited quality assets for sale is pushing buyers into secondary markets and driving price increases. For those types of assets, the top buyers are private equity or larger players. You’re also seeing crossover, first-time hotel buyers that are paying a higher price.”

And there are few better times to operate a hotel than right now. There’s record demand from customers, and also record demand from buyers. “There’s a tremendous amount of demand for the institutional-grade product and there’s not a lot of that type on the market right now,” Lee Hunter, COO of Hunter Hotel Advisors, told Hotel Management. “We’re telling our clients right now, if they own, they should consider catering to that demand.”

And the response has been, “I know I should sell, I know now is the time, but I can’t bring myself to do it. I know how much money I’m making and I don’t want to lose making that money,” Hunter added. He’s right. Room revenue as of June year to date was $64 billion, an increase of 8.4 percent compared to the same period for the prior year, according to STR.

There’s more good news from STR. In an October report, it showed that occupancy in the U.S. increased 3.8 percent to 70.3 percent for Q3 2014. The report also showed that average daily rate rose 5.2 percent to $117.91, while revenue per available room was up 9.2 percent to $82.93. Demand also increased 4.8 percent during the third quarter.

Want to get more granular? Consider San Francisco. As of this summer, the city’s hotel room prices were up almost 40 percent in the past five years. Average rates in the city have reached $200 per night, up from $123 five years ago, with four years of double-digit growth in cost per room contributing to this.

At the brand level, things are also good. Take Hyatt, which had a heady Q4, leading its CEO, Mark Hoplamazian, to say, “Looking ahead, we expect healthy occupancy levels in the U.S. to support increasing strength in room prices.” Exactly why 2015 should be the year to strike—particularly as the shadow of home-sharing sites like Airbnb grows. Noted PKF’s Lane, “Cities with high hotel occupancies tend to see the greatest growth in Airbnb, so it seems it’s where the excess demand is going.”

And if you don’t play your cards right, it’s also where the coveted millennial set could migrate to. And if millennials aren’t already on your radar, best to rethink that for 2015. MMGY Global Vice Chairman Peter Yesawich continues to note the increasing influence of the millennial generation. “Not only are there more millennials than baby boomers in the U.S. today, but research indicates that millennials intend to take more trips requiring a hotel stay than any of the other demographic groups,” he said.

It all points to an exciting 2015. So here’s to starting it up and hoping it never stops. And, just maybe, you’ll get some well-deserved “Satisfaction!”

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