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Reaching For Rip Roaring Good Times

The hotel industry is rocking to profitability. Here’s why everyone is going to be happy for the next few years.

Wednesday, January 23, 2013
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How sweet it is. Finally, lodging industry executives and financial folks are embracing the truth. The hotel industry is in the sweetest sweet spot there is and it’s made for the most exuberant, positively highly spirited and the most jubilant ALIS since 2005.

It was a significant change from October when at the Lodging Conference there was still a pervading sense of negativity which we dubbed the Phantom Menace; the phenomenon of not recognizing just how healthy the industry has become.

But now those last vestiges of negativity are shed. Executives have accepted industry fundamentals are solid and will remain solid. Plus, with Obama sworn in office a heightened sense of governmental certainty comes with it; and also the belief the rules of the game for the next four years are clearly understood.

It’s shifted the mentality of hospitality playmakers s. They’re emboldened. They’re ready for action and the deal machine is ready to start cranking out success stories.

It was interesting to bathe in the feeling of empowerment permeating the convention complex. The palpable feeling that amazing possibilities are imminent and that 2013 and beyond will be a time that many believe will top the halcyon days of 2007- 2008.

“I am having a hard a hard time coming up with any negative aspects,” said Mark Woodworth, Executive Vice President, PKF Consulting USA.

To grab a way too stale cliché, there’s a perfect storm a brewing. And it’s pointing to an amazing few years. But to fully understand the potential effect we must first look at both the operating side and the deal making side of the business.

The operating side of the business is in overdrive. Demand has been soaring for two years now, so much so the hotel industry is essentially breaking a new record for rooms nights sold on a nearly monthly basis. That’s given hotel operators the confidence to raise rates for leisure travelers and transient business travelers and may expect to wring out more dollars from group room sales as well as contracts come up for renewal.

According to a survey of ALIS attendees taken in the weeks leading up to the event 98 percent of respondents believe there will be RevPAR Increases in 2013. Fifty five percent of which believe that increase will be more than five percent.

And it looks as if later this year the industry will hit an all-time rate peak. Take that 2008.

According to Randy Smith, Chairman and Founder of Smith Travel Research the previous peak for ADR was $107. The industry is now seeing an avg ADR of $106.

“We thought it would take about six years for the rebound. We are going to get there this coming summer which is 5.5 years. But is going to take another year or to get to where we were at peak (adjusted for inflation,” said Smith.

And that’s just the half of it. For existing hotels, the incredible lack of development during the Great Recession has meant not a lot of new supply has been coming into the U.S. hotel market. And though that hurt the development community since they could not secure financing for the last few years, an unintended benefit is now being felt. That lack of new supply is helping existing hotels fill more rooms as the previously mentioned record demand is being spread among fewer properties.

But don’t expect that to continue indefinitely; hence the sweet spot. The rushing return of hotel profitability and the increasing stability of the banking industry is making money easier to buy. And that will prompt a new wave of development that is already on the upswing.

Bruce Ford, SVP Business Development at Lodging Econometrics says that new additions to the construction pipeline jumped 40% during the last year. Many are still in early stages of development and won’t open for 18 months to two years. That gives existing hotels a chance to mine higher profits while developers get the chance to build new hotels, all without impinging on profits for existing hotels

And hotel industry suppliers get to enjoy the fun as well. This year Ford predicts more hotels will be renovated in the hotel industry than in any other single year and this is the third year in a row for this phenomenon. From there suppliers can look to see an increase in new build hotel opportunities as renovations being to taper off for a few years.

So the question is how are you going to maximize the exciting upswing?
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