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The Magical Market

The hotel business will be in boom mode for a good few years. Here’s what to expect.

Thursday, January 30, 2014
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The hotel industry is in a period of potentially unprecedented profitability as immutable economic laws play into the hotel owner’s favor. That’s because the lodging business’ cycle is on a massive upswing and industry insiders have generally mostly good things to say about the domestic industry, even while pockets of pessimism persist.

At this year’s Americas Lodging Investment Summit (ALIS) most everyone was in high spirits as vast opportunities seemed achievable, boosted by a solid future forecast. Overall this year’s edition was one of the most exuberant ALIS events of all time, and the second most well attended too.

In surveying the crowd, the hotel investment and ownership communities are filled with palpable excitement for potential profits in 2014 and beyond.

“After four years of wondering where is the industry and will improvement be sustained, we know the answer is clearly yes,” said Mark Woodworth, President of PKF Hospitality Research, an affiliate of PKF Consulting USA. “If you look at industry fundamentals such as supply and demand, and what it means to occupancy, any way you choose to look at the key measures you have to walk away feeling pretty good and with a level of confidence.

Woodworth added demand should grow again this year at a multiple of the long run average and because there is absence of meaningful additional supply coming into the market. “Pricing power has shifted from buyer to seller, which gives [the industry] optimism for rates,” Woodworth added.

According to numbers supplied by PKF, final 2013 occupancy was 62.3 percent and is expected to rise to 63.2% and 64.4% for 2014 and 2015 respectively. It’s also expected that ADR will increase 4.8 percent to $115.60 this year and rise another 5.6 percent to $122.12 in 2015. ADR and occupancy increases together will help propel RevPAR from $68.69 (5.4 percent increase from 2012) up another 6.6 percent to $73.10 in 2014 while rising an additional 7.5 percent to $78.62 in 2015.

“Here is a big gap between demand growth and supply growth and this is reflected in a positive forecast for a few years,” said Jack Corgel, Robert C. Baker Professor of Real Estate and Director of Graduate Studies for the Baker Program in Real Estate, who also serves as Senior Advisor to PKF Hospitality Research.

Jim Ambrosia, President and CEO of G6 Hospitality, which owns and franchises Motel 6 and Studio 6 properties, is looking forward to a healthy 2014 for his company.

“It is not a question mark, the market will grow in 2014,” said Ambrosia, noting new supply has been kept in check, especially in the economy segment G6 operates within. He said hotel supply will actually drop one percent in that segment, a phenomenon that he sees as driving share and growth. “We see opportunity to grow share and expect rate growth because we are offering a more value enhanced product which will allow us to charge more,” he added.

G6 is in the midst of a complete redesign of its hotels Ambrosia said will allow those hotels to charge more as renovations are completed. Already more than 60,000 rooms of the system’s approximately 110,000 rooms have been enhanced, and all rooms will have the new Phoenix prototype design by the end of 2015. More than 450 hotels will be renovated this year alone.

Bakulesh ‘Buggsi’ Patel is President/ CEO of BHG Hotels, which currently operates 23 hotels. Overall, he sees the industry as rising quickly during the next couple of years. He does say there are markets in the country overbuilt during the mid-2000s construction boom such as Boise, ID. Those markets are still overbuilt and therefore underperforming.

However, he’s looking forward to the good times being around for a while. “I think we are going to have a banner year in 2014 and I still think it will be three more years of good growth,” said Patel, who is also serving as this year’s chair of the IHG Owners Association.

Patel also thinks hoteliers needn’t be scared to raise rates, especially for group business. “Group business is a challenge and I just don't feel operators are aggressive enough in the RFP process because they get scared and give away rates. They need to be bold enough and I don't think operations are using revenue tools and market analytical to help themselves either.”

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