The booming U.S. hotel market isn’t about to founder anytime soon, say hotel experts. Room demand has increased for an unprecedented 36 consecutive months through May, and one rosy projection calls for the sector to only strengthen during the next two years.
“Three straight years of [room] demand growth is pretty much unheard of,” said Randy Smith, president of Smith Travel Research. “The wide margin between supply and demand should help sustain this activity, too.”
On Monday morning, Smith addressed a packed ballroom at Manhattan’s Marriott Marquis Hotel, the cavernous venue for New York University’s 28th annual Hotel Investment Conference. The event, which attracts high-level executives from finance, development and brokerage firms, drew more than 1,900 attendees (a new record) this year.
Central to Smith’s optimistic forecast is limited new hotel supply and steady growth in revenue per available room (RevPar), a key industry metric that measures revenues and occupancy. RevPAR increased by 7.8% and 8.5% in 2004 and 2005 respectively. Smith projects that 2006 RevPAR will increase by 8.9% — an upward push driven by steady occupancy gains through the end of this year. Based on Smith’s projections, the lodging market will end 2007 with 64.8% of its rooms occupied (or 40 basis points higher than year-end 2006 occupancy).
Girding this forecast is limited new supply growth. Smith expects new supply to grow by just 0.8% in 2006 while demand should hit 2.8% — a spread of roughly 200 basis points. Both totals represent the percentage of total inventory. Looking ahead to 2007, that supply/demand spread narrows down to just 80 basis points — but demand will still exceed new supply.
“When you have such a wide margin between supply and demand, this is what you get. And the good news is that every segment is feeling the benefits of this,” said Smith, adding that the number of older hotel rooms being retired each year is increasing. While some of that was driven by last year’s powerful hurricanes that damaged many coastal resorts and hotels, other obsolete properties are simply being retired or converted into other uses.
Certain markets are growing faster than others. Chicago, for example, outpaced the nation through the first four months of 2006 with a 20% jump in RevPAR on a year-over-year basis. (For more on the booming Chicago hotel market, please turn to the June edition of NREI). Dallas and Atlanta came in second during that period with a 17.8% increase in RevPAR, followed by Atlanta, which tied that performance. To put those numbers into perspective, the average RevPAR increase for the top 25 markets tracked by Smith Travel was 11.1% during that period.
Despite this bullish outlook, Smith says that hotel profit margins are still constrained due to higher energy costs and inflation. This means that record profits aren’t flowing through the bottom line as they did back in 2000 during the last hotel boom’s peak.
“Costs are up across the board, but most hotel operators and managers finally have pricing power,” says Smith, adding that aggressive rates could offset some of these costs. These lofty construction costs have limited the amount of new construction.
Most of the 1,900 lodging executives that attended the NYU conference are equally as optimistic about the near-term outlook for the sector. According to an NYU poll that was conducted on-site, 53% of all attendees believe that the heated investment climate will continue for at least another two years. The survey also found that 38% of those polled would not sell hotels in the U.S. over the next 12 months while even more (or 65%) wouldn’t sell hotels outside of the U.S. Translation: Many investors have faith that the sellers market will endure on U.S. shores and even more investors expect it to continue offshore.
The strong seller’s market isn’t making it any easier to buy, either. Only 23% of the executives said they plan to purchase hotels in the U.S. over the next 12 months. An even higher number — 41% — wouldn’t consider buying hotels outside of the U.S. over that period.