I recently had the opportunity to attend the 5th Annual Midwest Lodging Investors Summit in Chicago and I wanted to share with you the thoughts from the various speakers.
A Five Year Retrospective
Occupancy is up. Business travel is back, and thankfully leisure never left. Group Business is starting to come back, Rev Par is up 6.8%. Natural gas, because of fracking will make us energy independent. PIP’s are back and stronger than ever. Five years ago the recession was just starting, the worst lodging downturn since 1973-1974. Recovery has been slower than anticipated. Cycles are no longer here, what you see is what you get. Generation Y is leading Generation X. The new thing is multi-generations. Grandparents, parents, children and grand children now vacation and travel together. The cost cutting that we made is here to stay. It will never be cheaper to buy than today for the next decade. Room rates will meet a new high. Profit margins will increase because of the reduced labor costs. Change breeds opportunity for success. Success is the ability to go from one failure to another with enthusiasm.
A View From The Top
We currently have the highest demand ever. Depth of each downturn gets deeper and more often. Record demand but ADR is not up. Now is the time to take the risk and raise rate or else you will miss the opportunity. The years 2007 & 2008 were the bubble numbers. Second half of 2012 is tepid. Urban select service is the most profitable right now. Focus, upper mid-scale & mid-scale is where the action is. New sells, old smells. Good beginning for 2012. Economy segment is finally getting some traction. Transient demand is strong but not rate. Group ADR is still depressed.
Market Report Segment Tracks
If you can find the financing, now is a great time to build urban or suburban but not interstate. Lifestyle centers are a good place to build a hotel. The guests like being able to walk to the restaurants and shops. Interstate travelers are impulse buyers. Colleges are great room demand generators. For every new freshman there were 4 applicants who visited the college with their parents.
Sixty-five percent of the loans that came due last year and year to date 2012 have not been paid off. Black Monday, when stocks lost 50% of their value happened in 1978. The Savings and Loan crisis happened in 1988. The Resolution Trust Era (RTC) was in 1993-1994. The great recession was in 2008-2009. The year 2007 was the pinnacle year, it will be several years until we return to the 2007 level, maybe 6 to 9 years. We have had the big increase in Rev Par, the next few years will only bring a modest gain of 3% annually. Nobody really knows whats going to happen with this economy. These are very uncertain times. Get your staff rejuvenated and enthusiastic. Get off the OTA’s. National hotel occupancy rate today is 60% it will grow to 63% in two years. Rate growth will have a cumulative gain of 4% over the next two years and then flatten out.
Transactions are back. Supply is still muted and will be for the next several years. Underwriting is still very stringent and painful, although there is plenty of debt capital available at very attractive rates.
PIP’s are a major factor now
PIP’s are forcing a lot of sales. There is still a big difference between ask and bid price, but the gap is narrowing. First half of last year was better than the second half. This year will be the same as things wind down. There are 3 tiers, REIT’s buying the upper tier in major markets. The middle tier $5.0M to $10.0M is the most difficult to finance. The lower tier has all cash buyers and SBA financing. Europe is still a major concern. We have a lack of real job growth. There is a flight to quality. Still a lot of uncertainty.
Who’s Got Money
Interest rates have only one direction to go and that is up. The Marcellus Shale Region located in Ohio, Pennsylvania & West Virginia is the largest known deposit of oil. Hotel values are a function of the National and Local Economy. CMB lending has come back. They along with Life Insurance Companies are making loans of 65% to value, 20 year amortization, 10 year balloon interest rates around 5.0%. The Small Business Administration Lenders (SBA) are making 80% loans to value. Local and Regional Banks are lending at 75% loan to value. Lenders are looking for a 1.4 to 1.5 debt coverage ratio. There is $1.7 Trillion of debt coming due in the next 5 years of which only half will be paid off. Extend and pretend has worked because values have increased over the last 2 years. Equity investors are looking for a 20% return. Construction financing is at 65% of cost primarily for select service product such as Courtyards, Hampton Inn & Suites, Hilton Garden Inns, Homewood Suites, Holiday Inn Expresses, Residence Inns and SpringHill Suites. The new norm for the unemployment rate is 8%. With the low supply growth, the lodging space is out-pacing the economy. The single family housing market is stabilizing. Don’t borrow more than 65%, otherwise you run a huge risk of not being able to refinance the debt when it comes due. Your attitude will determine your altitude.