Phase II of Hotel Recovery

Now that Phase I of the hotel market's recovery is complete, with vital signs improving on all fronts, what's next? Phase II promises to result in a wave of new construction and rising hotel values on the heels of improved operating performance, say real estate experts. Sales transactions will likely be plentiful in 2006 as there will be no dearth of buyers and sellers, predicts Patrick Ford, president of Portsmouth, N.H.-based Lodging Econometrics.

Additionally, 2006 will also be marked by “new brand announcements, and the reflagging and repositioning of hotel assets. This always takes place after operating recovery has been assured,” says Ford.

The vital signs for hotels have continued to improve in 2005. The occupancy rate nationally is expected to reach 67.3% by year's end, up from 65.2% in 2004. Meanwhile, the average daily rate (ADR) is forecast to rise 7.1% to $105.78. And revenue per available room (RevPAR) will increase about 10.6% to $71.14, according to researchers PKF Consulting, Torto Wheaton and Smith Travel Research.

Construction pipeline expands

Hotel construction, which bottomed out in the fourth quarter of 2003, will continue to ramp up. Lodging Econometrics projects that 848 new hotels will open in 2006, accounting for 88,711 rooms. (see table).

These figures remain modest compared with 1998 building levels, when 1,517 hotels with 156,194 new hotel rooms were added.

“New supply is in check for a variety of reasons,” says Arthur Adler, managing director and CEO of Jones Lang LaSalle Hotels in Chicago. In recent months, developers have faced rising costs for building materials — such as petroleum-based PVC and asphalt — and land, plus surging energy prices. Many construction workers are in the Gulf region rebuilding the area after Hurricanes Katrina and Rita, leaving many other areas of the country with a shortage of contractors.

The Gulf Coast hurricanes have exacerbated these conditions as building materials are also harder to come by outside the region. “It's more difficult than ever to get projects done on time and on budget,” says Ford.

“Keeping costs in line is certainly a real concern as we look at projects. We're challenged with this every day,” says Mitesh Shah, president and CEO of Atlanta-based Noble Investment Group.

With 26 hotels and more than 5,000 guest rooms, Noble is building properties, as well as acquiring hotels. The company opened four hotels in 2005 and is breaking ground on residential units and a 150-room lodge at its 800-room Calloway Gardens resort in Pine Mountain, Ga.

Ideal climate for brand expansions

Large hotel companies with powerful brands are also reaping the benefits of new construction as owners gravitate to those brands with powerful reservation systems, guest loyalty programs, and strong marketing programs. Developers of Hilton Hotels are on track to open about 170 of the branded properties in 2006, including 35 full-service hotels.

All told, there are 560 Hilton branded hotels in the development pipeline, says Tom Keltner, president of Hilton's brand performance and development group. “That's as large as our pipeline has ever been. The industry is solid not withstanding Katrina, Rita and Wilma,” says Keltner.

Buyers and sellers see opportunity

Although owners are hoping to keep projects on track, many are also joining the ranks of REITs, funds, and large hotel companies to acquire properties. While peak gains in occupancy, ADR and RevPAR have already occurred, operating fundamentals are expected to continue climbing in 2006. These factors are helping to push asset prices up, says Adler.

In most cases, purchasing a hotel — particularly a full-service property — still costs less than building a new property, which bodes well for buyers, he says.

Memphis-based Equity Inns, which owns 122 properties, has acquired 36 hotels since January 2004. With most of its hotels flagged as Marriott or Hilton brands, the REIT works with developers to buy newer limited-service or extended-stay properties.

“They build them, stabilize them in the market, and then flip the hotels to us,” says CEO Howard Silver.

It may be a good time to buy hotels, but sellers are also reaping the rewards of escalating values, says Mark Woodworth, executive managing director of PKF Hospitality Research in Atlanta.

FelCor Lodging Trust, an Irving, Texas-based REIT with 129 hotels, has been paring down its portfolio to concentrate on hotels in urban markets. For the first 10 months of 2005, FelCor sold seven hotels. The REIT also is marketing another 11 properties. Says CEO Thomas Corcoran, “It's a good time to sell hotels.”

Year New Hotels Rooms
2006 Est. 848 88,711
2005 Est. 674 68,044
2004 555 58,420
2003 604 73,370
2002 763 87,281
2001 1,055 111,344
2000 1,261 128,288
1999 1,402 153,337
1998 1,517 156,194
* Gross new openings prior to removals from census, such as hotel closings and conversions to alternate uses.
Source: Lodging Econometrics

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