HOTEL MARKET REPORT: 3Q2013 HOTEL CONTINUES ON A POSITIVE TRACK TRENDS FOR DEMAND AND ADR REMAIN SOLID, BUT COMING DELIVERIES REMAIN A CONCERN DEMAND: Although the pace is slowing, room night demand growth has remained above the 20-year average. Demand gains have been led by the business and transient sectors, with the group segment lagging (as compared to pre-recession trends). OCCUPANCY: Limited new supply introduction along with strong demand trends have continued to push occupancy levels higher. However, as indicated above, new supply is looming, particularly within certain markets. ADR: ADR continues to post gains with rates up 4.0% over 2012YTD figures, eclipsing 2008 s prerecession highs. Limited supply growth has allowed hotel operators to retain pricing power. RevPAR: Occupancy and ADR increases have driven RevPAR up 5.6% over 2012YTD figures. However, moderating demand figures will keep RevPAR in check, with just a small increase expected by year-end. SUPPLY: While elevated during the recession, new supply levels have remained below the long-term average since 2010. Deliveries should continue to slow as the pipeline clears through 2013, but watch out for new starts and brands delivering in 2014. SCALES: The top strata within the scales are leading the metrics; however, the lower ones continue to gain ground. MARKETS: The 25 largest have outperformed the broader market, but secondary markets are also seeing improvement. Prepared by: Eileen Grimm Real Estate Market Research PNC Real Estate 249 Fifth Avenue Pittsburgh, PA 15222 412-762-5477 eileen.grimm@pnc.com FORECAST: Continued room demand coupled with limited new supply moves bias more strongly positive. Moderate occupancy gains, but ADR growth expected to be key determinant in driving RevPAR levels higher. We anticipate improving metrics, but at a slower pace. Corporate profits scripted the first half of the hotel recovery, and now expansion, but the economy will become the major factor moving forward. Hotel Market Results Metric 2012 YTD Thru Sep 2013 2013 Projection Occupancy 1 61.4% (+2.5%) 63.9% (+1.5%) 62.2% (+1.4%) ADR 1 $106.10 (+4.2%) $110.38 (+4.0%) $110.61 (+4.2%) RevPAR 1 $65.17 (+6.8%) $70.50 (+5.6%) $68.85 (+5.7%) Supply 0.5% Increase 0.7% Increase 0.8% Increase Demand 3.0% Increase 2.2% Increase 2.2% Increase Note (1): Bracketed numbers represents percentage change from prior period Source: Smith Travel Research, PNC Real Estate Research PNC is a registered service mark of The PNC Financial Services Group, Inc. This document is for general informational purposes only and is not intended as specific advice or recommendations. The information contained herein is gathered from public sources believed by PNC to be accurate and reliable at time of publication, but neither PNC nor any of its affiliates is providing any guaranty or warranty as to the accuracy, completeness or reliability of that information or of the conclusions presented in this document. In addition, markets do change. Opinions expressed herein are subject to change without notice. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Any reliance upon the information provided herein is solely and exclusively at your own risk. 2013. The PNC Financial Services Group, Inc. All rights reserved.
THROUGH RECOVERY, STARTING EXPANSION 2 LIMITED SUPPLY AND STRONG DEMAND CONTINUE, BUT NEW PRODUCT IS COMING The adjacent chart illustrates that demand has outpaced new supply for nearly three years. As we move through the final quarter of 2013, overall supply numbers are expected to remain below average; however, there are signs of the coming additions. The construction engine has restarted and we are observing increasing permitting and starts. To date, lending remains constrained and expectations for 2013 and 2014 are that construction will be focused in the best markets with the best borrowers. However, supply levels need to be monitored closely, particularly in New York and Washington, DC. EXPANSIONARY CYCLE CONTINUES The hotel segment is now over three years into its recovery and occupancy and rates are past their pre-recession highs. The transient sector gains have contributed to the record levels of room night demand. The demand gains favor higher quality product, but improvement has been seen across all scales. Traditionally strong markets continue to push past recovery to expansion at a faster pace than secondary markets, but that gap is quickly closing. While forecasts indicate slowing demand growth in 2013, 2012 results were more robust than first expected and 2013YTD has posted better than expected gains. However, as we move forward, the economy should become the key determinant in the growth of the hotel segment. Total U.S., Supply & Demand % Change, 12 MMA 1/1990-9/2013 Source: Smith Travel Research OCCUPANCY ADR Source: STR RevPAR
THROUGH RECOVERY, STARTING EXPANSION 3 SEGMENT PERFORMANCE METRICS Source: Smith Travel Research Demand Continuing the positive trends that have been in place since February 2010, 2013YTD through September saw a 2.2% uptick in room nights sold (demand). The gains were recorded across all scales, with the Upscale category again leading the way at a 4.3% increase in demand. All geographic regions improved, with the Middle Atlantic region reporting the largest increase at 2.9%. All of the locational sub-classifications reported gains in demand, with Airport hotels the highest at 3.0%. So far, business and transient demand has led the recovery; however, recent data suggests group demand will show improvement over the remainder of the year and in 2014. Occupancy Demand increases continued to outpace supply additions, and the overall market recorded occupancy gains of 1.5% for 2013YTD. All segments reported gains, with Luxury and Independents leading the way, both at +1.7%. Occupancy levels vary significantly between the product classes, with the top three scales reporting at 72% or higher with the bottom three below 61%. However, the lower scales are gaining ground, especially Independent hotels. Upper Midscale product remains the mid-point of the scales, posting 65.6% occupancy as of 2013YTD. Within the locational sub-classifications, Airport hotels reported the largest gain through 2013YTD at +2.6%, and also the second highest occupancy at 71.2% (Luxury led at 71.7%). Average Daily Rate As occupancy moves higher, ADR continues to show steady gains especially among the top strata. Through 2013YTD, Luxury hotels posted the highest rate gains at 5.8%, with Upper Upscale and Upscale both up by 4.4%. Transient room rates continue to lead the ADR growth, but industry experts note signs of a recovery in group demand for 2014. RevPAR Overall, year-over-year RevPAR comparisons turned positive in March 2010 and have stayed to the plus side since. 2013YTD figures were 5.6% higher than 2012YTD results. As indicated above, the gains were driven by both higher occupancy and ADR. Luxury reported a 7.7% gain YTD, remaining the leader for the past 4 years. All but two of the top 25 markets showed year-over-year RevPAR growth, led by Oahu Island (+14.3%) and Houston (+13.7). Washington, D.C. was the worst performer of the top 25 for 2013Q3, reporting a 1.2% loss in RevPAR, reflecting a 2.0% occupancy loss, but tempered by a small 0.8% ADR gain. Nationally, RevPAR is projected to show 4.8% to 5.9% gains in 2013, with moderate increases in occupancy, but driven primarily by ADR growth. Supply Room supply expanded by 0.7% through 2013Q3. Although increasing, the rate remains below both the 2010 year-end delivery figure of 2.0% and the 20-year average expansion rate of 1.7%. Expectations are that the deliveries have bottomed and will continue at this relatively low level for the remainder of 2013. Across the scales, the largest expansion of supply is concentrated in the middle segments (Upscale and Upper Midscale). Watch out for 2014 supply additions; however, oversupply should be limited to only a few markets/submarkets. SUPPLY SEPTEMBER 2013 Chain Scale Existing Supply In Construction Active Pipeline Sep 2013 % Sep 12 Sep 2013 % Sep 12 Sep 2013 % Sep 12 Luxury 107,276 +0.2% 4,658 +16.9% 6,848-18.4% Upper Upscale 559,222 +1.1% 7,417-1.9% 22,689 +45.5% Upscale 608,138 +3.6% 30,580 +51.8% 87,867 +16.0% Upper Midscale 872,668 +0.4% 23,689 +25.0% 90,298 +4.3% Midscale 476,533 +1.1% 3,863 +35.2% 21,170-0.7% Economy 769,043-1.0% 1,169-8.0% 4,342-4.8% Unaffiliated 1,536,284 +0.3% 10,866 +24.2% 100,561 +31.2% Totals 4,929,164 +0.7% 82,242 +29.5% 333,775 +15.6% Active Pipeline includes in construction, final planning, and planning stages Sources: Smith Travel, CBRE-EA Construction Pipeline, PNC Real Market Estate Research
THROUGH RECOVERY, STARTING EXPANSION 4 Projections Our expectations for 2012 slightly exceeded the actual metrics, driven by slightly higher demand expectations; however, the forecasts were still within 1% of actual RevPAR. For the first time, we changed our projections in the second quarter due to early performance levels significantly outperforming prior year expectations. Had we stayed with the original projections, our accuracy would have been about the same but to the down side (meaning we would have underestimated RevPAR by about 1.1%). For 2013 our expectations maintain the course we observed at the end 2012, with continued strong but only slowly expanding demand levels. 2012 Actuals Measure (Growth) PNC Hotel Market Projections Projected 2012 Measure (Growth) Percentage Difference Forecast 2013 Measure (Growth) Occupancy 61.4% (+2.5%) 61.7% (+2.7%) +0.49% 61.9% (+0.8%) ADR $106.10 (+4.2%) $106.72 (+5.0%) +0.58% $110.34 (+4.0%) RevPAR $65.17 (+6.8%) $65.85 (+7.7%) +1.04% $68.30 (+4.8%) Supply 0.5% Increase 0.5% Increase As Forecast 1.4% Increase Demand 3.0% Increase 3.2% Increase +6.67% 2.2% Increase For 2013, forecasts provided by Smith Travel Research (STR), PKF, and PwC all have positive expectations for occupancy, ADR and RevPAR. Currently, projections range from 5.5% to 5.9% in anticipated RevPAR growth in 2013. All forecasts are looking for slightly stronger demand increases to provide small average occupancy gains, with most of the growth driven by continued expansion in ADR providing most of the increase in the overall RevPAR metric. The STR, PKF, and PwC projections are outlined below: Hotel Market Projections Smith Travel PKF PwC 2012 (Actual) 2013 2014 2013 2013 Occupancy 61.4% (+2.5%) 62.2% (+1.4%) 63.1% (+1.3%) 1.6% Increase 62.2% (+1.3%) ADR $106.10 (+4.2%) $110.61 (+4.2%) $115.73 (+4.6%) 4.2% Increase $110.59 (+4.1%) RevPAR $65.17 (+6.8%) $68.85 (+5.7%) $72.97 (+6.0%) 5.9% Increase $68.74 (+5.5%) Supply 0.5% Increase 0.8% Increase 1.1% Increase 0.8% Increase 0.7% Increase Demand 3.0% Increase 2.2% Increase 2.4% Increase 2.4% Increase 2.0% Increase 1. Bracketed numbers represent percentage change from prior year figures. Sources : STR Projections, PKF, PwC Hospitality Directions US November 2013, PNC Real Estate Market Research
THROUGH RECOVERY, STARTING EXPANSION 5 MARKET PERFORMANCE METRICS Construction Supply expansion began declining in 2009, and bottomed in 2012. While we have seen new hotel starts move higher in 2013, overall construction levels remain constrained, and the current pace of supply growth is slower as compared to the last expansionary period in 2002. While supply side conditions for the overall U.S. market remain in-check, experts caution that oversupply risks will be market specific. According to STR, supply levels within nine of the Top 26 markets are set to increase by 2.0% or more over the coming two years. While there are certainly a large number of new hotels underway in NYC, this market has also posted some of the strongest demand gains among the Top 25 Markets (up 5.0% as of 2013YTD).
THROUGH RECOVERY, STARTING EXPANSION 6 Market Performance The chart below plots performance metrics for the 50 largest hotel markets in the country. The change in occupancy from 2012Q3 to 2013Q3 is depicted along the horizontal axis and the change in ADR is illustrated along the vertical axis. Overall, the metrics indicate positive growth rates for both occupancy and ADR for most of the markets in the segment. As is often seen during the expansion phase, the chart illustrates negative occupancy levels coupled with positive rent growth; this often happens as new product enters the market, which is the explanation in most of the instances depicted here. As seen below, Washington, D.C. and the Norfolk-Virginia Beach area experienced overall declining occupancies. With close ties to the federal government, reductions in government and related travel have undermined performance in both metros. PwC notes that hotel markets that rely heavily on the federal government remain exposed to risks associated with the ongoing funding and debt ceiling discussions; however, on a positive note, federal per diem rates for most markets increased effective October. Source: Smith Travel Research
THROUGH RECOVERY, STARTING EXPANSION 7 SALES VOLUME AND CAPITALIZATION RATES Hotel investment totaled $5.4B this quarter, down 22% compared to Q2 and up 17% YOY. Full-service hotels remained the favored subtype at $4.3B, accounting for 82% of total Q3 sales. Real Capital Analytics (RCA) notes that forward momentum is strong with $4.5B of hotel transactions closed or in contract for Q4. Additionally, positive volume trends are also reflected in pricing. The Moody s/rca CPPI for the national hotel segment is up 16% this year, making it a top performer among the major property types. However, it should be noted that appreciation appears to have slowed in recent months. Portfolio transactions were light in Q3, totaling just $1.3B, but sales of individual properties strengthened. The number of hotel properties traded remained unchanged, but the average transaction size grew with large resorts such as Peabody in Orlando commanding $717M and the Hyatt Regency in Honolulu fetching $450M. Source: Real Capital Analytics Overall, capitalization rates for hotel properties remained stable for the quarter. Real Estate Research Corporation (RERC) indicated that rates were unchanged from the prior quarter, but down 20 bps compared to one year ago. Rates reported by PwC also indicate minimal quarterly changes, with full service hotels the same and limited service properties down 10 bps. From the transactional side, RCA indicated a 33 bps decrease in full service hotel rates from 7.76% to 8.09% and a 14 bps increase in limited service transactions from 8.53% to 8.67%. While reflective of actual deals in the market, the RCA transactional rates are often volatile due to the deals completed and the representative volume of transactions. While there may be various interpretations of the data, given the broader market data and position in the recovery/expansion cycle, our position is that capitalization rates for hotel properties are stabilizing. Additionally, while there are expectations for further improvement in the performance metrics (specifically related to ADR), the valuation bias is toward flat to very slowly increasing rates.