long time,” says Gregory LaBerge, national
director of Marcus & Millichap’s national
hospitality group, as previously reported in
Real Estate Forum’s sister publication,
GlobeSt.com. Further, “This will go on for
the next several years. Over the past few
years, we’ve seen some of the lowest num-
bers of new hotels coming on line.”
Supply was muted, LaBerge explains,
“There’s not
a lot of new
competition
in 2013 and
2014,
which will
perpetuate the growth in
occupancy.”
ROBERT MANDELBAUM
PKF Consulting
but demand soared, with 2012 posting
record room sales of nearly 1. 1 billion
nights. “And we’re supposed to blow
through that again this year.”
Agrees Jan Freitag, SVP at Smith Travel
Research, “In the first three months of this
year, the industry made more room reve-
nue, at $27 billion, than in any other first
quarter.” This positive moment will likely
continue for some time, he adds.
“While the number of existing rooms—
which is 1. 8 billion—is higher than it’s
ever been, it’s growing at a pace that’s
lower than its ever been,” says Freitag.
Although it’s not at levels that threaten
current supply and demand dynamics, the
pipeline is healthy. According to Lodging
Econometrics, the total pipeline consists
of 2,757 projects with 431,204 rooms. New
York is the top market, with Washington
DC and Houston following suit. From one
management company’s perspective,
growth is happening at a good pace.
“Our pipeline looks fantastic,” says Bill
Fortier, SVP of Americas development at
Hilton Worldwide. “We added more than
500 properties last year, we could add 600
this year and possibly 700 in 2014.”
It’s not a bad time for those looking to
break into hotels to consider building, he
suggests. “It’s cheaper right now to build
than to buy.”
Still, the pace of growth in the market is
far from a rapid clip, Freitag notes. “The
long term average is 2.1% and we’re at
0.6% for 2013. This is the lowest level of
construction we’ve ever seen.” The pace is
lending an assist to pricing, he adds. The
slow growth “means occupancy has to go
up, and that gives you pricing power. For
the first quarter, occupancy was 57.7% and
ADR was $108.” By contrast, according to
PKF data, occupancy was 56.7% for Q1
2012, and ADR was $103.
But if an asset class is so popular, can a
buyer get in? “That’s the problem,” admits
Freitag. “We’re expecting room rate and
RevPAR growth in the next 24 to 36
months to be rate-growth driven and
that’ll drive NOI, which should then drive
real estate values.”
Players in the market and analysts alike
feel the best bang for a buck in the hotel
sector right now is limited- (also known as
select- or focused-) service hotels.
“Focused service is the darling of the
industry right now,” declares Fortier. “Big
private equity funds finally figured out
that there’s more to be made in focused
service than full service,” he asserts.
“There’s better long-term return and less
risk because there aren’t costs for food
and beverage service and the like, which
can be expensive to maintain.”
In addition, he says, “Focused service,
which has very little debt, doesn’t have
much swing in its EBITDA, whereas full-
service properties have a lot of fluctua-
tion because of food and beverage sales
and group room nights,” asserts Fortier.
“That’s the category of spend that falls off
dramatically in a downturn.”
At least one such brand from Hilton’s
portfolio, Hampton Hotels, is a good
example of the success of this hotel seg-
ment. The chain opened 22 new proper-
ties—adding 2,134 guestrooms—in the
first quarter, kicking off an expected 90
openings this year. In 2012, 70 Hampton
Hotels made their debut.
“We target select-service hotels because
they are a more efficient and less-complex
operating model with stronger margins,”
adds Greg Merage, CEO of MIG Real Estate,
which recently purchased its fourth such
property in the Tampa, FL area, “and they
offer a much lower investment cost per
room compared to their full-service counter-
parts. Within this category, we like the ‘power
brands’—such as Marriott, Hilton, IHG,
Hyatt—because of their robust marketing
engines and successful loyalty programs.”
And limited-service hotels still pack
plenty of value, Mandelbaum says.
“There’s a lack of availability at full-ser-
vice hotels with the high occupancy lev-
els, so people have to seek rooms in lower
priced properties.” Also, he noted, “as the
top-tier hotels drive rates up, people will
trade down because of price, so lower-
priced properties will do better, too.”
Several other industry participants note
though that full-service assets, in a some-
what distressed condition, are also a great
buy right now.
“In the
first three
months of
this year,
the industry
made more
room revenue, $27 billion,
than any other first quarter.”
JAN FREITAG
Smith Travel Research
And even in this healthier economy,
there are still distressed properties in need
of new ownership, he says. “Today there are
not as many deep distressed situations, such
as bankruptcy, as there were several years
ago but there are still many opportunities
where owners do not have adequate capital
to invest in their assets appropriately and
