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Another Banner Year for the Hospitality Industry

Feb 3, 2014

The sentiment at the Americas Lodging Investment Summit conference this past week was positive with most participants including brokers, lenders, owners and private equity investors expecting revenue per available room (RevPAR) growth of between 5% and 6%, supply remaining in check, and hotel values rising.

Entering its fifth year of recovery, RevPAR growth will be driven mainly by average daily rate growth as demand continues to increase and limited supply growth persists. Forecasts for 3% real GDP growth, an improving job market, and continued growth in the group-demand segment should support further growth and profitability.

Supply growth remains in check as a result of lenders historically being cautious to deploy capital, especially for new construction. That trend is changing as more lenders are looking to get in the game and private equity groups are flush with cash and aggressively looking for yield. While we expect to see supply growth increasing this year, new construction is not a near-term threat to recovery. New supply is not expected to be a concern until 2016. 

An increase in capital availability from existing lenders and new investors and lenders should continue for the near term. Existing lenders are becoming more comfortable with the stability of the industry and are increasingly more aggressive with financing terms. New lenders including Asian lenders are entering the market. Participants reported that new debt is being issued at between 65% and 70% loan-to-value and debt yield requirements are averaging between 7% and 9%. 

Cap rate compression should continue as availability of capital and a plethora of investors fuels competition for deals. New development will become increasingly more attractive to investors as cap rates for existing assets continue to compress and lenders become increasingly comfortable with lending for new construction. Many participants at the conference noted that cash-flowing assets are trading at or above replacement cost, further encouraging investors to consider development. 

Hotel profits should grow despite headwinds from the impact of the Affordable Care Act, legislation for increases in the minimum wage, and increases in interest rates. Additional costs loom for hotel owners from the implementation of new brand initiatives and large Property Improvement Plan (PIP) requirements. 

In conclusion, industry fundamentals are solid, supply growth is in check, and hotel profits should continue to grow through 2015. Happy New Year indeed.

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Deborah S. Friedland

Deborah Friedland specializes in in operational strategy analysis, asset management, valuation, internal control review and assessments, market studies, and transactional due diligence for investors and lenders.

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