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Hotel investment climate about as good as it gets

The cyclical nature of the commercial real estate industry never ceases to amaze me. It happens all the time: a property type that is out of favor for a few years suddenly shows up on an investor's radar screen. The hospitality industry is a fitting example. Last month, I attended the 17th annual Hotel Investment Conference in Atlanta. The standing-room-only gathering at the Crowne Plaza Ravinia attracted a few hundred attendees, many of them owners from throughout the Southeast.

The conference theme, “The Right Industry, The Right Time,” only three years earlier would have been aptly titled “The Wrong Industry, The Wrong Time.” Recall that in 2001 and 2002, revenue per available room (RevPar) declined and was basically flat in 2003, in part because business travel had dramatically slowed and concerns over future terrorist attacks put a damper on leisure travel.

But the vital signs of the industry today are quite healthy, which is undoubtedly why so many industry players came early one Monday morning to hear Mark Lomanno, president of Smith Travel Research, rattle off several encouraging vital signs.

In 2004, RevPar jumped 7.8%, the average daily rate rose 4% and occupancy ticked up 3.7%. What's more, room demand rose 4.7% in 2004. In fact, the lodging industry last year sold more than 1 billion rooms — the first time that's ever happened. On average, the lodging industry every day last year sold 125,000 more rooms than it did in 2003.

“To put that in perspective, that's like looking at Las Vegas and saying that every day in 2003 was completely empty, and every day in 2004 was completely full,” Lomanno remarked during his presentation. “That's a lot more people coming to stay in hotel rooms.” That kind of super growth is unsustainable, Lomanno believes, but strong growth will still occur.

Here's some even better news for hotel investors: While demand was up 4.7% last year, new supply inched up only 0.9%, well below the 25-year historical average of 2%. “We are going through an extended period where supply growth has been below historical averages,” says Lomanno.

There is one indicator that is a little worrisome, says economist Donald Ratajczak. Lodging industry construction expenditures are up 32% year-over-year. “Do you think you guys aren't going to overbuild again?” His rhetorical question drew laughter from the audience.

“Are we eventually going to see the industry turning down just as capacity increases? Well, the answer is, of course,” says Ratajczak. “That's how the hotel sector works.”

When will that occur? Not this year, because the economy is humming and the vital signs of hotels are so strong. But during the second half of next year, Ratajczak says, the U.S. economy could slow to less than 3% growth. That's when the oversupply problem, now in remission, could begin to rear its ugly head again.

But that's next year. Right now the environment for investors is terrific. “All the stars are lined up, we're having the perfect storm,” says Bob Hunter, president of Hunter Realty Associates, and conference chair. “It's a great time to be a buyer and a seller.”

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