2015 Mid-Year Viewpoint Lodging Overview

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1 U.S. The national lodging market has continued its positive momentum through the first half of This can be attributed to a combination of factors, including increased consumer confidence, decreasing fuel costs, stable international visitorship, and decreasing unemployment, among others. Supply/Construction Overview As market conditions continue to improve, new construction is occurring, resulting in an increase in inventory of approximately 1.0% as of year-to-date This represents the largest amount of inventory added to the market since The current inventory represents a total of approximately 1.6 million rooms, according to Smith Travel Research. Although construction activity has remained steady, the new inventory added to the market lags new demand, which is reported at an increase of 3.4% year-over-year. The IRR Mid-Year Viewpoint survey indicates that the lodging industry is in expansion mode, with approximately 77% of respondents echoing this sentiment. User: Fæ / Wikimedia Commons / CC-BY-SA-2.0 Upper mid-scale-branded limited service properties are being constructed and then flipped to investors for a profit upon construction completion. This primarily includes Hilton, Marriott, and IHG branded properties. Investors are willing to pay a premium over the construction costs typically ranging from $20,000 - $50,000 per key for limited service properties, and to take on the risk during the property stabilization period. Page 1 of 9

2 ADR Overview Throughout the first half of 2015, ADR increases have been realized across the market within both the limited service and full service industry. Smith Travel reports the national ADR rebounded to $ year-todate, which is the highest ADR over the survey period. This includes both full service and limited service product. The current year-todate increase of 4.7% is the highest growth realized in the past five years, a positive sign for the continued recovery of the market. Since 2010, year-to-date ADR has increased 18.7%. Year-end 2014 ADR was reported at $115.01, and year-to-date 2015 indicates an increase of 2.9% since that time. The ADR reported by the 2015 IRR Mid-Year Viewpoint survey is $ for full service properties and $ for limited service product. The Eastern Region reports the highest ADR, at $ for full service and $ for limited service properties, respectively. The Central Region reported the lowest ADR. Occupancy Overview Based IRR s research, the national average occupancy level for full service lodging properties is 71.9%, and 68.9% for limited service product. The West Region reported the highest occupancy levels at 78.3% for full service and 72.9% for limited service, with the Central Region reporting the lowest occupancy rates of the four regions. A harsh winter had negative impacts on hotel performance in the Northeast, including New York City, Boston, and Chicago. However, international travel remains steady to the United States, which has resulted in relatively stable international demand. In addition, relatively low fuel prices have resulted in an increase in domestic leisure travel, which has resulted in an increase in occupancy levels. The decrease in oil prices has resulted in a downward pressure on inflation, which would suggest nominal ADR growth; however, this is essentially offset by higher lodging demand due to increases in leisure travel supported by cheaper fuel prices. Overall, with stable construction growth and increasing demand, occupancy levels are expected to continue to improve. Page 2 of 9

3 RevPAR Overview The recognized increases in both ADR and occupancy have combined to form positive RevPAR growth. As of year-to-date 2015, RevPAR has grown by 7.2%, according to Smith Travel Research. RevPAR increases are projected at 7.3% throughout the remainder of 2015, and 6.8% in Increases in RevPAR can be attributed primarily to ADR growth, which has historically resulted in greater profitability to owners when compared to RevPAR increases fueled primarily by occupancy growth. IRR forecasts that the West Region will see the greatest increase in ADR growth in the next 12 months. Continued increases in RevPAR have allowed new construction to become feasible in many markets throughout the United States. Expense Growth Overview Although ADR, occupancy, and RevPAR growth has been experienced, increases in profitability are being curtailed by expense increases. The economic downturn caused operators to seek efficient methods of controlling expenses, and new methods of controlling expenses were developed. Fixed expenses are not expected to increase dramatically; however, increasing variable expenses are expected to have an impact on profits, going forward. Labor expenses comprise a primary expense concern, and the recent decline in the unemployment rate has led to higher wages and higher associated labor expenses within the hospitality industry. Inflation is expected to remain low, which will result in low inflationary pressures on profitability growth. Page 3 of 9

4 Cap Rate Overview Cap rate compression has continued throughout 2015, particularly with regards to nationally flagged properties. The market has indicated steady improvement over the past several years and future steady growth is projected, resulting in a perceived low-risk current investment outlook. IRR reports that national full service lodging properties have experienced a cap rate contraction of 14 basis points to the current level of 8.00% over the past six months. In addition, limited service properties have experienced a cap rate contraction of 17 basis points since January 2015, decreasing from 8.78% to 8.61%. The highest contraction is reported in the West Region, at 24 basis points for full service properties and 19 basis points for limited service properties. The West Region reports the lowest cap rates, with full service properties at 7.63% and limited service properties at 8.08%, and the East Region just above at 7.67% and 8.31%, respectively. Within the limited service sector, the upper tier midscale flags remain strong with investors, including primarily Hilton, Marriott, and IHG brands. There is a defined spread in cap rates between the upper tier midscale brands and lower tier / economy product, as the upper tier brands appeal to a wider and more sophisticated investor base. Economy product continues to be targeted by local investors who typically analyze the property based on a Room Revenue Multiplier basis. Page 4 of 9

5 Cap Rate Overview (continued) Cap rates have continued to decrease since their peak in The majority of survey respondents indicated a steady outlook for cap rates for both limited service and full service lodging properties throughout the remainder of 2015 and into IRR s lodging experts indicate that real estate risk premiums, availability of financing, and national economic conditions are the primary factors affecting cap rates for institutional grade properties. Property Trends Overview New brands are being formulated to suit the taste of Millennials, who represent the fastest growing travel demographic. This is causing a shift from the traditional large luxurious rooms to smaller rooms with better technology and features. The focus of this demographic is on urban locations and new brands such as the Hyatt Centric, Marriott AC and Moxy, and Hilton Canopy are filling this demand. For example, the Marriott Moxy brand features smaller room sizes with upgraded desk and workspace areas, along with larger lobbies, local artwork, and healthy eating options. In addition, there has been an increased emphasis on innovative technology, such as mobile check-in and booking, and connectivity across platforms and devices. An increase in health and fitness awareness nationally has encouraged hoteliers to offer healthier food options and improved fitness options. National brands continue to require their franchisees to maintain the brand standards and recognition, with new designs and Property Improvement Plans. Long-standing brands such as Courtyard by Marriott and Fairfield Inn and Suites have implemented new design standards to maintain updated branding and positive market acceptance. In addition, new concepts including Hilton s Home 2 Suites are expanding nationwide to meet changing consumer demands. Page 5 of 9

6 Caribbean Hotel performance in the Caribbean continues to improve for the third straight year, nearly reaching prerecessionary levels. Hotels are buoyed by tourist arrivals to the region which are also on the increase. Data from the Caribbean Tourism Organization (CTO) has reported that growth in stayover arrivals to the top 13 Caribbean reporting markets rose over 7% for the first part of the year; with significant growth occurring in Cuba (14.3%) and Aruba (18.3%). All of the top markets reported positive growth except for Martinique. Countries with the highest growth in 2014 have slowed down to a more typical rate of growth; particularly Dominican Republic (6.8%) and the Cayman Islands (4.4%). Total arrivals to the 33 reporting markets reached 26.3 million in 2014; representing growth of 5.3% overall. According to data from Smith Travel Research (STR, Inc.) for the Year-to-Date January through June, hotel performance in the Caribbean continued a trend of improvement. Average Daily Rates (ADR) grew by 2.7% to $217.05, while occupancy was up 3.06% to 74.63%, leading to Revenue per Available Room (RevPar) growth of 4.99% ($163.16). Page 6 of 9

7 Caribbean (continued) The overall trend for the year-to-date (Jan-Jun) reflects an increase in all three metrics ongoing since Source: Smith Travel Research (STR, Inc.) We note that while there is continued growth in rates, the rate of growth for ADR and RevPar appears to have slowed to a more manageable level in the last year. Occupancies, which leveled somewhat in 2014, are rising again so far this year. As of June, 2015, STR reported 172 Caribbean hotels in the Caribbean and Mexico region totaling 29,938 rooms in the in-contract stage ( formerly active pipeline ). This represents a 7.1% increase in rooms under contract, compared with the same period last year. There have been a number of transactions involving hotels in the region, though these are mostly of troubled properties for renovation and re-branding purposes. Page 7 of 9

8 Conclusion The U.S. and Caribbean lodging markets have continued their positive momentum through the first half of Occupancy has grown to levels higher than previously experienced, and ADR growth has also reached a higher rate thus far in 2015 when compared to previous years. Current and projected revenue growth is fueled primarily by ADR increases, which is a positive factor for increased profitability. Nationally branded properties remain a favorable investment for both domestic and international investors, and cap rates have continued to compress over the past 12 months. The perceived stability of the market has contributed to the continued decline in cap rates. Lodging Market Cycle Page 8 of 9

9 For Further Information For further details regarding any of the information contained herein, please contact: Daniel Beverly Senior Analyst IRR-Orange County, CA Ridge Route Drive Suite 100 Laguna Hills, CA Phone: Anthony M. Graziano, MAI, CRE, FRICS Senior Managing Director IRR- Miami/Palm Beach, FL 2600 Douglas Road, Suite 801 Coral Gables, FL Phone: James V. Andrews, MAI, CRE, FRICS, ASA, CVA Senior Managing Director Integra Realty Resources Caribbean Cayman Business Park Suite A5 Mail Box 751, Grand Cayman, KY Cayman Islands Toll Free USA/Canada: Direct: About IRR Integra Realty Resources (IRR) is the largest independent commercial real estate valuation and consulting firm in North America, with over 200 MAI-designated members of the of the Appraisal Institute among over 865 professionals based in our 65 offices throughout the United States and the Caribbean. Founded in 1999, the firm specializes in real estate appraisals, feasibility and market studies, expert testimony, and related property consulting services across all local and national markets. Our valuation and counseling services span all commercial property types and locations, from individual properties to large portfolio assignments. For more information, visit or blog.irr.com. Disclaimer While the great majority of data and content contained herein is proprietary to IRR, this publication includes calculation based data attribution provided by third parties, and while the available data is presumed to be accurate, no representation or warranty is made regarding the accuracy of the information contained in this publication. This publication does not render legal, accounting, appraisal, counseling, investment or other professional advice. Should such services or other expert assistance be needed, it is recommended that the services of a competent person or firm, having access to the details of the situation, be employed. Page 9 of 9