excited about the development momentum we’re seeing with
our select service brands, such as Aloft and Four Points by
Sheraton. Aloft will open 20 hotels globally this year; 13 of those
are in North America and of those, five are conversions of exist-
ing hotels or adaptive reuse projects.”
Loews Hotels & Resorts will invest $175 million to renovate its
properties in 2013 as it expands its client base with new services
and offerings, says Paul Whetsell, its president and chief execu-
tive. The New York holding company had 17 hotels when Whetsell
joined the firm in January 2012, and he plans to double the size
of the company over the next two to three years, chiefly through
conversions of existing properties. “By 2015, we will be at 34 to 35
hotels,” he predicts.
There are plenty of performance indicators to support such
expectations for growth. The hospitality industry just closed out
its second consecutive year of record demand, as measured in
total room nights sold. US hotels tracked by Hendersonville,
TN-based research firm STR sold an all-time high of more than
107.46 billion room nights in 2011, and STR’s preliminary calculations suggest that demand in 2012 bested that total by 2.8%. In
2013, demand will increase by another 1.2% over last year’s figure, according to STR’s projections.
Despite operating in a lackluster economy, US hospitality sector performance improved by virtually every metric in 2012.
Preliminary tabulations for the year showed the average daily rate
climbed to $106.17, up 4.3% from the previous year, according to
STR. Thanks to a minimal supply gain of 0.5% from new construction, occupancy rose to 61.3%, STR found. That equates to a
2.3% increase year over year.
Perhaps most significant for owners and operators, climbing
room rates and greater occupancy drove up RevPAR to an estimated $65.08 per night, a hefty 6.6% gain from the previous year,
according to STR. And if forecasters have it right, average revenues
will grow stronger in the months ahead.
The US lodging industry turned the corner in the second quarter of 2010 and has been experiencing a healthy recovery trend
Starwood Hotels & Resorts sees development momentum among its select-service brands, such as this Four Points by Sheraton at the New Orleans Airport.
that will continue through 2016, according to forecaster R. Mark
Woodworth, president of PKF Hospitality Research LLC in Atlanta.
“The industry continues to get better,” Woodworth says, “and at a
faster pace than we had anticipated.”
Those improvements will help operators to boost room rates by
an average of 5.4% each year for the next four years, Woodworth
predicts. “One of the more remarkable aspects of this recovery is
that in spite of all this economic uncertainty, we’ve had this
demand recovery and, for two years now, consistent increases in
ADRs. So in a very real way, there’s no reason to think we won’t see
more of that in 2013 and beyond.”
One reason behind that conclusion is upward movement in the
average occupancy rate, which was on track to end 2012 at 61.5%.
PKF expects occupancy to reach 62.1% by the end of 2013, and while
that level is below the pre-recession peak of 63.1%, it would exceed
the US long-run average occupancy rate of 61.9%, Woodworth says.
Hotel managers in previous economic cycles have found the
long-run average to be a tipping point, at which they gain sufficient
leverage to demand higher prices for rooms, according to PKF.
“When we break through that long-run
61.9% average, scarcity becomes more
common and hotel managers can begin
more aggressively increasing room rates,”
The prospect of filling hotel rooms
more often and at higher rates is an equation that hotel managers salivate over.
According to PKF, that scenario will result
in average annual RevPAR growth of 7.2%
for the next four years—more than double
the historic long-run average.
Some markets will require some more
vigilance than others to avoid a rate-crush-ing onslaught of additional supply.
Construction in New York City in particular
has put hotels there at greater risk, says
Raymond Martz, CFO at Pebblebrook
Hotel Trust in Bethesda, MD.
“That’s the one market where there is
some supply concern,” Martz says. “But for-
tunately, if you look at Lower Manhattan,
demand growth has been tremendous.
Lower Manhattan on a trailing 12-month
basis is at 85.4% occupancy—that’s the
highest occupancy market in the country.”
Looking beyond New York, demand
Hotel investment specialists say healthy property fundamentals will continue to draw buyers and
equity investors to the sector in 2013, but high prices have dampened hopes for finding steals.
“In the markets in which we want to grow—major gateway cities in North America—I wouldn’t
say there are any particular bargains out there,” says Paul Whetsell, president and CEO of Loews
Hotels & Resorts. “We’re able to be pretty selective and go after properties that meet our brand
standards, and sometimes we have to buy a hotel and bring it up to our standards.”
Lenders have grown increasingly receptive to financing hospitality acquisitions, particularly for
buyers with a strong balance sheet and willingness to provide substantial equity, Whetsell says.
Loews tends to buy properties it can improve through branding and efficient operations, and it uses
conservative leverage of 50% to 60% of the purchase price. “If you take that approach, financing is
Transaction volume in the sector appeared to be leveling off at the end of 2012; Newmark Grubb
Knight Frank tracked 107 significant single-asset hotel sales in 2012, with a collective value of
nearly $7 billion. That marked a substantial decline from 2011’s total of 158 transactions for more
than $10.9 billion.
“The public hotel REITs have slowed their transaction volume considerably,” says Jonathan
Falik, head of hospitality capital markets for BGC Partners and head of hotel investment sales for
Newmark Grubb Knight Frank. It’s unclear whether last year’s volume decline was due to economic
uncertainty or simply sticker shock as competitive bidding drove up prices. On a per-room basis,
average hotel prices have risen steadily over the past four years to reach $257,836 per key in 2012,
up from $235,902 the previous year, Newmark found. Price per key was well below $200,000 until
the previous peak year of 2006, when the average shot up to $291,610.