I recently had the pleasure of attending the 29th Annual Hunter Hotel Conference on March 22nd, 23rd and 24th in Atlanta, Georgia and wanted to share with you some of the thoughts from the Industry’s Experts.
We still don’t know the final outcome of the Marriott/Starwood Merger. A strong brand is one that connects with the consumer and has a vision. Consumer preferences constantly change. A lot of brand blur. There are too many brands, the consumer is confused. The best measure of a brand is when the industry is in a trough. As an owner you are paying twice for a customer, Franchisor and the OTA’s. The question is who owns the customer. If there is a storm you can probably survive with 35% equity and 65% debt. Three interest rate hikes this year and 3 more next year.
State Of The Industry
Not a lot of clarity in the market. Transaction volume in 2016 was off by 40% compared to 2015. Cap rates are up by 150 basis points since the 2014 cap rate of 7.0. The market is not very liquid. Fifty percent of all new construction is just in 4 markets, New York, Dallas, Boston and Nashville. Residence Inns and Hampton Inns are in their own league as far as investment returns. Select Service Hotels provide a very stable cash flow. There is a 600 basis point difference between a Select Service Hotel return and the 10 year Treasury Bond. There is more capital than product to buy.
Occupancy will have a slight decline due to supply exceeding demand. We have had 84 months of RevPar Growth and it is expected we will enjoy another 2 years of RevPar Growth due to ADR Growth, not occupancy. Transient is considered 1 to 9 rooms, group 10 or more. This year we will sell more rooms than ever before, but we have more rooms than ever before. Two thirds of the new rooms being built are upscale and upper upscale, not building the big box full service hotels. Airbnb occupancy is highest on the weekends. Airbnb runs about a 50% occupancy. Fifty percent Airbnb stays are 7 days or longer. Labor costs will continue to rise due to the low unemployment rate. Occupancy year to date is down by 1.2%. People are still traveling they just have more options now, more rooms and Airbnb. Fifty-five percent of transient business is booked because of loyalty programs. Job growth is what drives demand for hotel rooms. Brands are like swim lanes in a large pool. Marriott with its acquisition of Starwood has 30 brands. Courtyard has been named number one in guest satisfaction. Marriott opens a new hotel every 14 hours across the world. Marriott has over 100 Million Royalty Members, adding one million new members every month. Guests prefer to communicate with the hotel staff by texting versus a phone call. The guest can respond at their convenience. The way to overcome the effects of the
OTA’s is to exceed the guest’s expectations. Rate of change is happening quicker than ever. Change in retail brands, some former iconic brands don’t exist now. Average cap rate in 2016 was 8.5%. We are at peak values. Slight RevPar growth decline for the next couple of years. Thirty six percent of the transactions last year were purchased by foreign capital.
Supply Long Run Avg 1.9% 2017 CBRE 2.0% 2017 STR 2.0% 2018 CBRE 2.1% 2018 STR 2.2%
Demand Long Run Avg 2.0% 2017 CBRE 1.9% 2017 STR 1.7% 2018 CBRE 1.8% 2018 STR 2.0%
Occupancy Long Run Avg 62.00% 2017 CBRE 65.4% 2017 STR -0.3% 2018 CBRE 65.1% 2018 STR -0.2%
ADR Long Run Avg 3.0% 2017 CBRE 3.1% 2017 STR 2.8% 2018 CBRE 2.9% 2018 STR 2.8%
RevPar Long Run Ave 3.2% 2017 CBRE 3.0% 2017 STR 2.5% 2018 CBRE 2.5% 2018 STR 2.6%
Transaction volume last year was 36 Billion Dollars. Starwood Brands are now more valuable, now that they are under the Marriott Banner. Hilton and Marriott are the twin 800 pound gorillas. Full service cap rates have ranged from 7.1 to 7.6% over the last 6 years. Cap rates are increasing as a result of the increase in interest rates and slowing RevPar Growth. Cap rates are expected to increase by a half point. Financing is getting more difficult especially for new construction. Private Equity has a lot of cash sitting on the sidelines. REIT’s have a lot of cash as they have sold a lot of their assets. A lot of new development is being cancelled because of high construction costs. Construction costs are based more upon square footage than the finishes. Midtier markets offer more potential than high profile markets.
Buying And Selling Hotels In An Active Market
Eighty percent of the attendees at the conference plan to build a hotel in 2017 and 2018. Five most important metrics in buying a hotel:
- Yield including any potential upside
- Are the demand generators diverse
- Quality of the brand
- High barriers to entry
- Strong RevPar Market
Cap rates range from 8.0 to 9.0 they are 50 to 75 basis higher than last year. All in cap rate including PIP for full service 7.8% for limited service 8.5%. Marriott requires a PIP every 7 years, Hilton requires a PIP upon a sale. Construction costs are up 7 to 8% over last year. Every good market is getting a lot of multifamily construction, causing prices to go up. There is a lot of brain damage in building a hotel.
OTA’s & Airbnb are here to stay. OTA’s have been around for 20 years. They had 18% growth last year. 2016 Hotel Supply change 3%, 2016 Airbnb supply increase 117%. Last year was the highest occupancy rate since 1984. 2017 new supply will outpace demand.
New Hotel Development
Construction lending primarily comes from local and regional banks. Construction costs for a stick built hotel have increased from $90.00/s.f. to $140.00/s.f. since the end of the great recession. Land cost should be around 15 to 20% of the total development cost. Mixed use developments with restaurants, retail and office within walking distance are ideal places to build hotels. As you can see from the experts the foreseeable future looks very good for the hotel industry
We have several “all Cash Buyers” who are eager to purchase.