I recently had the pleasure of attending the 26th Annual Hunter Hotel Conference in Atlanta, Georgia where the theme was “The Time Is Now”. It is a great time to “refinance, buy, develop, sell and renovate”. There were 48 Lenders at this conference which confirms Money Is Back. Of the more than 1,000 attendees 57% of them stated they intend to develop a hotel in 2014.
Leadership and Experience
Private equity firms are buying existing hotels at a 9.0 cap rate. Apple REIT is still actively buying institutional grade hotels. The Economy segment has had the biggest percentage increase over the last 3 years, and it also had the largest decrease during the Great Recession. Restaurant and meeting room revenues are still down by 30% compared to 2007. Group demand is still off. Technology will have the biggest overall impact on the hospitality industry.
The Future Is Your Decision – 2014 U.S. Economy and The Lodging Industry
There has been a significant recession about every 7 years for the last 30 years. The economy is fluid it is always changing. Consumers and business spending has been muted for the last 4 years, this is changing. The economy is starting to rise at a faster pace. Cost of money will slowly rise. Inflation is under control. Overall we are in a growth mode. There will be steady but slow growth through 2017. Don’t expect hyperinflation. Consumer expectations are the highest in 6 years. Four percent retail sales growth, consumers are back they are spending money. Interest rates are not going to go up in 2014 and only slightly in 2015. Interest rates are not going to soar they are going to slowly rise. We now produce 50% of our energy needs. Our dependence on foreign oil has decreased by 50% over the last 5 years. We will have more recessions but probably not another Great Recession. United States has 21.0% of the World GDP. There are headwinds in the economy with health care being the strongest headwind. We see the world not as it is but as we see it.
We are in the 3rd to 4th inning of this recovery. Cycles are getting shorter and more volatile. Instead of the government buying paper the government should be investing in the Country’s Infrastructure, roads, highways, bridges and education. The unemployment rate for college educated people is less than 4%. The Penn State University Index of U.S. Hotels Values projects a 6.9% increase in hotel values in 2014. Hotel Values will probably peak in 2016-2017. Buyers and Investors are more knowledgeable today. Lenders are loaning 65 to 80% of the value of the property.
In Construction 2014: 98 2013: 74 % Change: 32%
Final Planning 2014: 133 2013: 95 % Change: 40%
Planning 2014: 127 2013: 150 % Change: -16%
Active Pipeline 2014: 358 2013: 280 % Change: 12%
Total US Pipeline, by Phase, 000’s Rooms, February 2014 and 2013, STR
Historically 2% Supply Growth we have not had this amount of growth since 2009. Average life of a PIP is 7 years. Product is 2/3 of guest satisfaction.
U.S. Hotel Forecast
Supply STR: 1.2% PKF: 1.2% PwC: 1.0%
Demand STR: 2.3% PKF: 3.0% PwC: 2.4%
Occupancy STR: 1.1% PKF: 1.8% PwC: 1.4%
ADR STR: 4.2% PKF: 4.8% PwC: 4.5%
Rev Par STR: 5.3% PKF: 6.6% PwC: 6.0%
Supply STR: 1.6% PKF: 1.1%
Demand STR: 2.1% PKF: 3.3%
Occupancy STR: .5% PKF: 1.8%
ADR STR: 4.2% PKF: 5.6%
Rev Par STR: 4.7% PKF: 7.5%
Whether you are buying or building you need to have an exit strategy.
Hotel Values In A Rising Market
New supply, as soon as Brand Approval has been secured it has an adverse effect on the market even before ground is broken. Cap rates have increased as a result of increased net operating income. Not a significant increase in interest rates over the next few years, but a gradual increase. It is a good time to be doing something. It still makes sense to buy versus build, but it is getting very close. We are in the sixth inning of a double header game, there will be a lull and then it will pick up. New supply has the most adverse effect on the value of a hotel even more so than a PIP. The slower growth the economy is experiencing should cause this recovery to last longer. We are in a sweet spot. The uncertainty with the government is one of the strongest headwinds our industry is facing. Demand is up, occupancy levels are good, it is time to move the rate.
Buying And Selling Hotels In An Active Market
Cost of construction has risen by 20% to 30% over the last 2 years. Lack of labor is the problem, many of the subcontractors went out of business during the Great Recession. Their workers found a different industry. It will take about a year to gain back the subcontractors, and then prices will decrease by about 10%. Cap Rates going forward 8.5% to 9.50%. Cap Rates of 7% for the Investment Grade Quality Hotels for REIT’s.
Hotel Development Is Back
Construction costs are back to the 2007-2008 levels. $5.00 to $10.00/s.f. cheaper to build with wood versus block & plank. Wood construction has come a long way in controlling noise. There are over 2 Million decisions made when building a hotel.
Hotel Financing The Time Is Now – Finance Friday
The CMBS markets are back $45 Billion in 2012, $85 Billion in 2013 and over $100 Billion expected in 2014. Interest rates have risen. Slow to moderate growth has caused the abnormally low interest rates, too many headwinds holding the economy down. The time is now to lock in long term financing. LIBOR and Rev Par move in a parallel path. Incredible amount of Capital setting on the sidelines earning zero. The temptation is to overpay in order to put this money to work. Lots of liquidity in the debt market. Every month the Banks are required to submit a report to the Federal Reserve on every commercial loan of $1.0M or more part of Dodd Frank Regulatory Control. Lot of reporting requirements. The Industry will remain healthy as long as demand exceeds supply growth. Remarkably slow growth.
Creative Financing Techniques
Overabundance of Capital a few more years of growth. 4.5% to 5.0% interest rates on non recourse loans with 30 year amortization. Lot of capital debt has come to the market within the last year. Underwriting is aggressive but supportive. Lot of pent up demand. Loan to deposit ratios are extremely low. Debt service coverage ratio for Bank Loans is 1.25. According to keynote speaker Chris Nassetta, President and CEO of Hilton Worldwide we are in a very favorable economic condition for the lodging industry. He calls it “goldilocks”, not too hot, not too cold. “This is as good as I’ve seen it. I’ve been through a number of cycles but this is different, it’s a longer cycle. There’s been a lid on demand. The time is now to move rates. Demand is back, occupancy levels are high, its getting better. We should be smarter about it.”
We have lots of Buyers, more Buyers than Sellers. We have all Cash Buyers, Hoteliers, Private Investors and REIT’s all looking to purchase hotels.