Author of www.HotelLawBlog.com
22 September 2006
As a record 1,200 delegates gathered at The Lodging Conference held at the Arizona Biltmore in Phoenix this week, the mood might be best described as “ebullient foreboding.” According to Jones Lang LaSalle, we are seeing an unprecedented level of hotel transactions–more than $21 billion in the first six months of 2006 and more than all twelve months of 2005. And Smith Travel Research told us how well-positioned the industry is for sustained profitability and growth with continuing record RevPAR growth increases, demand growth still outpacing supply, and big barriers to entry.
The hospitality industry looks to be well poised to steam ahead for at least several years. In fact, although history is no guarantee, we are only three and a half years into the hotel industry recovery cycle that started in late 2002. These recovery cycles have averaged more than 7 years. But despite this “ebullience,” there were definite foreboding undertones of “things are so good now, that this can’t go on much longer.” I hope we don’t talk ourselves into a downturn!
Here are some of the details on where we are, and where we seem to be going, mostly from the presentation Mark Lomanno (President, Smith Travel Research) gave at The Lodging Conference just two days ago. One barometer measuring the health of the hospitality industry is the number of people attending industry conferences. By this measure alone — with the record attendance of 1,200 people at the Phoenix Lodging Conference — things must be pretty good. Fortunately, the statistics from Smith Travel Research provide ample support for that proposition.
In comparing results for 2006 to 2005, the August year-to-date numbers show that supply growth remained constant at a low .5%, demand growth dipped to 1.9% from 3.3%,and occupancy growth declined to1.3% from 2.6% — continuing to grow but just at a slightly reduced rate. However, ADR growth jumped to 6.7% in 2006 from 4.8% in 2005, and RevPAR increased to 8.3% growth from 7.6%. These are very strong numbers.
It is significant that although the occupancy growth rate (2.1% for 2006) is moderating, the limited supply growth has caused ADR to continue its strong upward trend (at 6.7%). The positive trends are even stronger for certain segments such as the luxury and upper upscale segment and for transient business. And certain geographic markets have also dramatically outperformed the industry.
For example, although the average change in ADR for the entire United States is an impressive 6.8% growth, the average for the top 25 markets is 9.2%. And the top 25 markets are exceeded by at least 11 major markets, including, in increasing order of ADR growth: San Francisco (9.5% growth in ADR), Phoenix, Los Angeles, Boston, Dallas, Orlando, Atlanta, Miami, Chicago, New York, and Oahu (14.7% growth in ADR).
The supply pipeline is increasing, however, with 162,020 hotel rooms “in construction” in August 2006 compared to 93,361 rooms in construction in August 2005, a 73.5% increase and a number that is cause for some concern, but not panic.
Based upon a number of economic indicators and assumptions, including Real GDP, CPI, Corporate Profits, Disposable Personal Income and Unemployment Rates, STR makes a number of interesting projections:
• Growth in demand will continue to outpace the growth in supply by 1.9% compared to .8% for 2006 (a difference of 1.1%), and by 1.7% to 1.6% for 2007 (a difference of only .1%)
• Occupancy will continue to grow in 2006 and 2007 but at reduced levels of 1.1% and .1%, respectively
• RevPAR growth will continue at near record levels in 2006 and 2007 of 7.9% and 6.7%
The continued RevPAR growth is particularly significant. If STR’s projections are accurate, the industry will have enjoyed RevPAR growth of 7.8% in 2004, 8.5% in 2005, 7.9% in 2006 and 6.7% in 2007. The huge significance of these numbers is that until 2004, in the entire time that STR has been gathering data (since 1989), RevPAR growth has never exceeded 7%. With 2006 almost “in the can,” it is virtually certain that this year will mark three years of all-time record RevPAR growth. And it is extremely likely with the fundamentals in place that 2007 will not be far behind.
Supply seems to be picking up and the hotel industry usually commits suicide by building an oversupply of hotel rooms — more than the public demands. However, high construction costs, high cost of land, and limited financing available for new construction continue to provide significant barriers to entry which bodes well for the long-term health of the hospitality industry.
We have to agree that things are pretty darn good in the hospitality industry, but we don’t agree that there’s any call for brooding. And we certainly hope that we don’t talk ourselves into a downturn and create a self-fulfilling prophecy.
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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.
Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $87 billion of hotel transactional experience, involving more than 3,900 properties located around the globe.
Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.
Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.
Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.