Benefitting from unprecedented growth in 2013 — and even faster overall economic growth anticipated this year — the hotel sector can bet on gaining still more guests and higher revenues this year.
That’s among the findings in two new reports: Lodging Econometrics’ fourth quarter U.S. hotel transactions summary and Marcus & Millichap’s hospitality research quarterly update.
Says the former: the lodging industry reached an estimated total investment of 21.8 billion in 2013, marking its highest level since 2009. Better, it is expected to accelerate higher in 2014 and subsequent years.
For 2013, 1,171 hotels were sold or transferred, a decrease of 19 percent year-over-year, the report states. Previously, total transactions and property transfers peaked at 3,218 hotels — or 441,613 rooms — in 2007, then precipitously fell to a bottom of 528 hotels/ 60,804 rooms in 2009, a decrease of 84 percent.
Of the 1,171 property transfers last year, 775 were individual single asset transactions, which increased 18 percent year-over-year. Another 395 were portfolio transactions, which decreased 49 percent YOY. Merger and acquisition property transfers were of no significance in either 2012 or 2013, according to LE.
For hotel transactions with a reported selling price, activity totaled $16.8 billion in 2013. Private equity funds and hotel companies accounted for 62 percent of sell-side activity. Publicly Traded REITs followed suit with 18 percent of the sales activity.
Now that we are beyond the recovery phase, says Lodging Econometrics, investors see greater opportunity ahead in the second leg of the lodging cycle, which should cause transaction activity to accelerate over the next few years.
Steady economic growth should bring increases in guest room demand and greater pricing opportunity, the firm predicts. Further, the construction pipeline won’t produce new supply additions of significance until later in the decade so profitability should continue to improve. Also expected is an increase in portfolio and M&A volume as Wall Street becomes reenergized and the lodging industry begins to consolidate.
While giving more of a 30,0000-foot view, the M&M report largely supports these findings. Positive economic trends throughout 2013 and faster economic growth in 2014 are expected to generate additional hotel stays and drive revenue higher.
The potential risks to US economic performance are minimal but some issues on tap this year could adversely affect hotel performance, the firm states. The Federal Reserve has come under new leadership, which could create some uncertainty in the markets, and chair Janet Yellin faces the responsibility of managing the taper of quantitative easing.
Meanwhile, hotel owners will continue to address the implementation of the Affordable Care Act this year. However, Washington did provide greater clarity for 2014 by passing a budget at the end of last year. A restoration of funding for defense and other programs undoubtedly will help several states where hotels were harmed when local businesses lost government contracts.
The latter report differs in its take on supply coming into the market. A growing construction pipeline will influence investment decisions throughout 2014 as the construction cycle shifts into a higher gear following years of limited supply growth, says M&M. The pipeline of rooms under construction at the end of 2013 was modest, representing roughly 2 percent of existing stock, but more than 300,000 additional rooms are under consideration.
As for property sales, through the first three quarters of 2013, more than half of the hotels sold in 2013 were midscale and upper-midscale chains and investors will maintain their focus on this market segment in the year ahead.
Hotel investors can expect this year to be the fifth consecutive year of growth for their lodging assets, predicts M&M. An increase in travel volume will expand room nights by 2.4 percent and raise nationwide occupancy 90 basis points to 63.25% during 2014, topping the pre-recession peak posted eight years ago. A 4.8 percent increase in average daily room rate will be the primary impetus for a 7.3 percent rise in nationwide room revenue during the year.
But issues to watch—with which Washington DC and local municipalities will grapple — include a possible immigration overhaul and a potential spread of minimum wage initiatives.