Hotels Q1 2015 Outlook
After taking a big hit during the Great Recession, the hotel sector is now one of the healthiest commercial real estate sections today. According to Peter Muoio, PhD, chief economist and managing director for Auction.com Research, the sector “really improved over the past 18 months, and to see such strong annualized growth rates…well it’s quite impressive.” The high occupancy rates continue to support solid room rate growth, and as a result, room rates are now 5.2 percent higher than a year ago. “Even the weakest markets are experiencing increased occupancy,” said Muoio. With the U.S. economy in the expansion mode, consumers are taking vacations again, while business trips are also increasing. In 2014, the number of international visitors to the U.S. reached 62.7 million, according to the International Trade Administration. In addition, in 2013, U.S. residents took 452 million business trips domestically last year, according to the U.S. Travel Association. As a result, hotel occupancies and average daily rates per room have shown robust improvement.
Leisure, business, and international travelers are the catalysts of hotel demand, and all three of these factors have been steadily increasing. Consumer spending on hotels and motels grew 10.4 percent from third quarter 2013 to third quarter 2014 according to Auction.com, and this spending should continue increasing as long as the economy remains good. Trends show that baby boomers and millennials spend their discretionary income on travel as their top preference. “Spending on hotels and motels has been stronger and more sustained growth versus retail spending,” Muoio notes. “It’s been an atypically strong piece of consumer spending.” Similarly, business travel continues to increase as well according to the Global Business Travel Association (GBTA). “U.S. business travel ended 2014 on a high note, with record spending expected to reach $292.2 billion.” The GBTA projects this trend to carry into 2015 as well.
Hospitality research from Marcus & Millichap showed that amidst the upturn in the hotel industry, there are “[d]iverse sources of equity and debt continue to rush into the hotel sector” and support a thriving investment market. With the increase in travel, “construction remains a topic of discussion, but not necessarily a matter of overwhelming concern.” “While overbuilding is certainly possible, thus far the market performance of this industry has not yet been affected.” This report indicates that annual hotel occupancy in the U.S. will rise to 63.7% which is a pre-recession peak. The continued increase in travel is projected to carry well into the next year according to this report.
PKF Consulting USA, which specializes in research on the hospitality industry, forecasts that hoteliers will be able to increase their average daily rates at an average annual pace of 5.7% from 2015 to 2017. The years between 2011 and 2015 may prove to be longest period of continuous double-digit profit growth for the hospitality industry since the late 1970s, according to PKF. Greater profit growth should affect all hotel sectors, but may be most evident at resort and full-service hotels. Encouraged by the hospitality sector’s performance, many investors globally have reportedly increased their allocations to this industry.
According to research firm Pricewaterhouse Coopers, an improving macroeconomic outlook could sustain increases in the hotels market. Growth in gross domestic product and employment levels have resulted in greater demand for travel and hotels. The report noted that lodging occupancy levels have surged to their highest levels since 1984. The PwC report also attributes these gains to the surge of travel activity, especially with the solid performance and demand in the airline industry.
Peer-to-peer real estate marketplaces such as Realty Mogul make it easier for accredited investors to participate in hotel opportunities. Realty Mogul can be a great platform for individual investors, as well as large institutions, to participate in the resurgence in the hotel sector.
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