27 January 2013
Hotel Lawyer with the mood of the hotel industry from the ALIS conference
If you didn’t attend the ALIS hotel conference in Los Angeles this year, you really missed something!
Hotel investment conference attendance is a barometer for the health of the hotel industry. Companies send lots of delegates to these conferences when they are doing well, expect increased business, and are optimistic about the future. By that standard, things are really looking up for the hotel industry in 2013 and beyond!
But industry fundamentals also backup this optimism. And there was more consensus than we have seen for many years that things are good and continuing to get better – – with at least a five-year run of improving economics and values. (5 years!)
But there is more good news . . .
A lot of good news
Here are some bytes of good news to consider:
- ALIS attendance exceeded 2500 registrations. This is the third largest registration in 14 years, second to 2007 and 2008.
- 2012 turned out considerably better than most hotel industry experts expected. 2013 and 2014 are expected to continue that trend and get stronger. The industry is positioned for continued increases in prosperity and hotel values through at least 2017.
- Uncertainty is the “new normal” and did not affect record demand for hotel rooms.
- Seven of the top 25 markets have broken out with double digit RevPAR increases. The experts look for a trickle-down to continue to the other 18 top 25 markets, and also in the secondary and tertiary markets. (If Starwood Capital and Blackstone have already gone to secondary markets, everyone else will too.)
- ADRs are increasing faster than occupancy growth. RevPAR growth is projected to reach almost 6% per year on a national basis this year and next. Continued economic improvement will drive hotel industry profits and values.
- The hotel industry statistics are good but more impressive than they seems. ADR growth is being weighed down by new hotel opening offering cheap rates to get established. Also, as most industry statistics measure “growth,” continued improvement gets tougher when the comparative numbers continue to increase as they have been doing.
- Transaction volume is picking up substantially and projected to increase significantly in the next five years. Arthur Adler of JLL says we should expect a 10% increase in volume for each year over the next 5 years, but could be more for a number of reasons. Five markets in the US (New York, San Francisco, Chicago, Washington DC, and Miami) accounted for more than 30% of the hotel transactions in 2012.
- The upper end (upper upscale and above) continues to lead the market and to increase ADRs.
- We should return to the peak levels of RevPAR in 2015 on and inflation-adjusted basis.
Despite all the good news, many challenges will remain. Hotel industry leaders say that controlling expenses will be one of the top issues. Costs are rising for employee benefits, taxes (income, real estate, personal property, TOT, etc), insurance, franchise fees, PIPs, software costs, and chain services.
Some point out that with all the cost-cutting done since the Great Recession it is hard to cut costs any further. They have already been cut. Our “fixed costs” (as the Uniform System calls them) are not fixed anymore. They are skyrocketing.
Others point out that the impact of Hurricane Sandy is still coming. There’ll be a huge increase in insurance and issues of availability when renewals come up on May 1, 2013.
Competitive financing for existing, cash-flowing hotels
Hotel financing continues to be a “Tale of Two Cities.”
Hotel development continues to be done by a select few with deep cash reserves, long established relationships, and EB-5 financing.
But for stabilized hotels with good cash flow, debt financing is plentiful, competitive and cheap. For instance, Phil Ribolow of Deutsche Bank thinks the debt markets are maybe back to 2005 or 2006 levels, with 10 year, fixed-rate debt available at about 4% interest. Loans are now being underwritten at a 10-11% debt yield instead of on a debt service coverage ratio basis.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at firstname.lastname@example.org or +1 (310) 201-3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
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.