After undergoing the worst downturn in revenue and demand since the Great Depression, the hospitality industry made a rapid recovery in 2010.
According to Bruce Baltin, senior vice president, PKF Consulting, the recovery in the hospitality industry is being led by corporate travel, followed by leisure travel. The group market has lagged. While the overall recovery varies from market to market, New York, Boston, Miami, San Francisco, and other gateway cities are back to prerecession peaks. Even in markets that have lagged, demand and occupancy rates are returning to healthy levels. The last 12 months saw the most hotel rooms ever booked, but the increasing demand was not matched by rates or pricing.
Baltin joined David Sherf, CFO, Ascendant Lodging Partners, and Bernard Siegel, principal, KSL Capital Partners, in a lively discussion of today’s hotel and resort markets and tomorrow’s trends at the ULI Spring Council Forum in Phoenix, Arizona.
According to Sherf, one new trend that is driving demand is social media. Chains that have not aggressively developed a social media strategy are losing business. Today, 50 percent of bookings are made online and 70 percent of consumers use social media to see how hotels are rated. Prospective hotel developers and investors need to understand that the hospitality business is different than it used to be because of the vast expansion of distribution channels, such as Expedia.com, Hotels.com, and Priceline.com. What’s more, consumers have figured out that the later you book, the better rate you can get. This is just one of the trends that are hurting profitability. Other trends affecting profitability are the following: rising energy costs, inflation, technology investments, and personnel costs.
On the plus side, rates and pricing are bound to grow because of the lack of new room supply. During the boom, hotel room supply was growing at the rate of 2.2 percent annually. Given the fact that demand is up with almost no new supply, pricing—it is hoped—will follow. From 2005 to 2007, the hospitality industry added 160,000 to 180,000 rooms per year; this year, the industry will add about 35,000.
The panel also discussed the three tiers of properties available for investment. These are as follows:
Institutional grade assets (four-star hotels and above), which have lots of buyers including real estate investment trusts and offshore investors;
High-grade assets, not in major urban areas; and
Turnaround opportunities, where investors are looking to create value by upgrading properties or switching brands.
According to Siegel, the resort sector was the hardest hit by the recession and many investors, like large private equity funds, have moved into more defensive positions, favoring membership businesses like golf, ski, or health and fitness facilities. He also noted that private equity companies have a hard time competing with publicly traded companies, particularly in the top six markets.
Because the pipeline for new properties is so slim and because it takes three to five years to build a high-quality, full-service hotel, Siegel said he thought that hotels would remain a good investment through 2015, although he also noted that “over time, hotels have very good returns.”
In addition to the investment analysis, much of the discussion among the panelists revolved around changing demographics and technology. Young people (i.e., generation Y) are comfortable with technology and they are more design- and lifestyle-oriented than their parents. Sherf noted that if an older person has a bad experience with a hotel, he or she suffers in silence. That individual might never return to the hotel, but he or she largely keeps quiet about the experience. On the other hand, when young people have a bad experience, they go online immediately to tell everyone about it. As a result, hotels must now have personnel monitoring social media, trip adviser, and travel rating sites 24 hours a day.
Young people also have far less brand identity or loyalty than did their parents; this has resulted in hotels trying to “unbrand” themselves. Independent is cool; national chains are not. As a result, independent and boutique products are growing and major chains are trying to create unbranded identities.