1 November 2011
Congratulations to Hotel Management on a great annual hotel conference in Washington DC.
Our heartiest congratulations to Stacy Silver and Stephanie Ricca of Hotel Management and their team for a great first day (just ended) on their 3rd annual hotel conference, now called NATHIC (North America Hotel and Tourism Investment Conference). This was my first time attending this conference, but it certainly won’t be my last.
Washington DC makes an excellent venue for a conference, because it is efficient to combine the conference with business meetings with so many hotel companies based in the greater metropolitan area. Washington DC is a capital of the hotel industry.
So here is my take on the trip to Washington, DC and the NATHIC conference so far.
Some pre-Conference wisdom from Clay Dickinson of JLL
With the conference starting at 2 pm, I had plenty of time before the conference for some business meetings. One of them was to catch up with long-time industry colleague, Clay Dickinson, Executive Vice President of Jones Lang LaSalle in the Strategic Advisory group.
Maybe you have heard this before, but I have not and thought it was a great way to describe how we all should describe our products or services to our customers or clients. Apparently Clay learned this from his stint with IBM a few years ago.
In essence, this is what he said:
- Customers buying a drill do not really want a drill. They want to make holes in something.
- Customers buying a computer do not want a box of electronic parts. They want to accomplish particular tasks (word processing, data management, financial modeling, and the like).
- We all need to explain to our constituencies how our product or service will help them accomplish what they really want, and not talk about the product itself in terms of features, except to the extent they help the customers accomplish what they want.
Even if the road ahead is a little bumpy, we’re not slipping back into recession
Patrick “JP” Ford of Lodging Econometrics led off on the first panel with some interesting data on where we are in the industry. But I was most impressed with JP’s positive outlook on for the hotel industry.
He does not believe we will slip back into recession, despite the recent turmoil in the markets. He says “We are on track.” And while there may be some instability, the industry will continue to trend upward.
Lodging Econometrics is particularly known for it data on the construction pipeline. In this area, JP says that new construction peaked in 2008 and the boom cycle ended in 2009. New construction starts have been dormant since then with new supply scheduled to be less than 1% growth this year – significantly under long-term industry average.
Lodging Econometrics projects that new construction projects will start up again in 2012 and financing will be back in 2013.
Looking more deeply into recent hotel transactions
One of Ford’s other observations that I found interesting was the makeup of the hotel transactions – the players in the purchase and sale of hotels. Of course transaction activity is up substantially in 2011 over 2010, but JP noted that:
- REITs have been the biggest buyers in 2011 (at least until August 2011) accounting for $3.6 billion in hotel purchases in 2011 vs. $1.8 billion in 2010.
- Equity funds have been net sellers this year.
- Privately held hotel companies have been biggest sellers – by 3.5 times.
It will be interesting to see where this goes with REITs largely on the sidelines for the past 60-90 days.
Robert Mandelbaum gives us some good news on hotel industry prospects even if the economy continues to struggle.
I have been an avid follower of Robert Mandelbaum’s work for many years, often reading the great research that he, Mark Woodworth and other PKF Research colleagues have produced over the years. I have heard Robert speak at industry conferences and even worked recently on a significant litigation matter with Mark Woodworth.
But until NATHIC, I had never had a chance to sit down with Robert and chat a bit. It was a real pleasure to meet him. (And yes, he said he reads the Blog!)
Robert led off his presentation with a cogent explanation of why the hotel industry will likely not be spooked by continued struggles of the economy, European tumult and other factors. No one is under the impression that these headwinds help the hotel industry, but many of us have wondered how our industry can continue to improve when unemployment remains high, consumer confidence is on a roller coaster, and the markets are so uncertain. Here is what Robert said, in a nutshell:
- PKF has observed a strong correlation between corporate profits and lodging demand. Corporate profits continue to do well, and the rise in corporate profits seems to boost business travel.
- We all wish that the unemployment situation was much better. But when you look below the surface, the implications for the hotel industry are much more positive than one might think.
- Although the general unemployment rate is above 9%, people with college degrees have an unemployment rate closer to 4%.
- And the more education you have, the more money you tend to make. And fortunately for the hotel industry, high-income, high-education people tend to travel more and stay at hotels.
- Moodys Analytics says the outlook for high income people is more favorable in years to come.
Coming at it from another direction, Robert gave some insight on the correlation of GDP to lodging demand. For many years there has been an extremely high correlation, with virtually a 1 to 1 direct correlation. But for a number of years that correlation has seemed “broken.”
Robert and his team examined the 4 basic components of GDP and found that two of them seem to have a much higher correlation to lodging demand. Those two are business investment and consumer spending. Robert says that the favorable forecast for these factors drives more optimistic forecasts for the lodging industry.
When will ADR move?
Most markets are growing in occupancy, but have not yet reached the long-term average. But the real laggard has been the rate. Fortunately, there is no significant new supply. And even with modest growth in ADR, profits will continue to improve.
PKF says that 17 of 50 markets they follow will be at or above long-term average occupancy rates in 2011. Half of the markets will not reach the long-term average occupancy rates until 2013.
On ADR, only 2 of 50 major markets will achieve prior peak ADRs of 2006 or 2007 in 2011, and this will be a slower recovery – even in nominal dollars as opposed to inflation-adjusted dollars. That recovery is probably 2013 or 2014.
NOTE: Robert has a fancy formula for expressing this, but in street English he says that a change in ADR has 50% more impact on NOI than a corresponding increase in occupancy. That is why the current trend for increasing ADR has such an important impact on profitability of the hotel industry.
The bottom line?
PKF is projecting 15.1 to 15.2% growth in the bottom line for 2012.
Poor health of the economy does not seem to match continued strength of the lodging industry. Robert thinks they have the explanation (see above discussion on lower unemployment among the more educated, more affluent, more traveling population).
Robert does add that some new data has just been released by Moodys and it is a little more pessimistic than 90 days ago. But performance during the first part of this quarter was ahead. So the results will probably net out for the year in 2011. However, 2012 will likely be a little slower than hoped for or projected.
PKF also has a “recession forecast” – which Moodys says is only 25% chance. Under this scenario,- the most pessimistic -RevPAR growth will still be 2.4% in 2012. That is positive RevPAR growth even in a recession.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solu
tions to unlock value from hotels. Who’s your hotel lawyer?
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