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Hotel Industry Continues to Ride Economy’s Tailwinds

Hotel Industry Continues to Ride Economy’s Tailwinds

The U.S. hotel industry continues to ride the tailwind of the economic recovery, buoyed by positive room demand, occupancy increases, and steady average daily rate growth. According to industry executives who spoke at the 36th annual New York University International Hospitality Industry Investment Conference, the industry has at least another four to five years to run in the current cycle.

“We’re likely to run into extra innings,” said Tom Baltimore, president and CEO of RLJ Lodging Trust, during the REIT Beat panel on June 2.

Monty Bennett, chairman and CEO of Ashford Hospitality Trust, said he doesn’t see a recession happening again any time soon, especially since the Federal Reserve is still very accommodative. “Interest rates will have to move up in order to suck enough wind out of the economy to cause a recession.”

Improving employment is another good indicator of a longer cycle, added Jay Shah, CEO of Hersha Hospitality Trust. “As more people re-enter the workforce, I think that bodes very well for the economy.”

Secular shifts are also driving additional travel in the United States. “When you think about the trends that are afoot globally, it’s urbanization, globalization, and digitalization,” Shah said. “I think all three of those are putting us in an era of travel that we haven’t seen before.”

Looking back at the last 12 months, hotel company CEOs also feel confident about where the industry is headed. “The performance of our business and the industry overall has been positive,” said Frits van Paasschen, president and CEO of Starwood Hotels & Resorts Worldwide. “That’s been fueled by trends of rising wealth and overall greater demand by travel but also the influence of technology.”

J. Allen Smith, who assumed the role of president and CEO of Four Seasons Hotels & Resorts in September, said high-end and low-end consumer goods seem to be behaving positively right now. “Certainly our business that is exclusively positioned at the very high end of the market has been performing exceptionally well. With the exception of locations that are really impacted by political strife or disruption, we’ve seen really remarkable RevPAR gains all over the world. The outlook for the business is extremely positive.”

Promising hotel industry data supports this rosy outlook. According to Amanda Hite, president and chief operating officer of STR, the U.S. hotel industry has had 44 consecutive months of RevPAR gains with many more months of continued growth ahead. The country also has seen steady demand increases over the last several years. “We’re currently at a 2.5 percent demand increase, which is well above our long-term average of 1.7 percent,” Hite said.

STR forecasts occupancy growth of 1.4 percent this year. However, demand and occupancy growth are expected to slow a bit in 2015 as new supply comes in. There are 103,000 hotel rooms currently under construction in the United States—an increase of nearly 43 percent from this time last year. Of those rooms, 68 percent are limited service in the upscale and upper midscale segments.

Hotel values will continue to grow but at a slower rate, said Steve Rushmore, founder and chairman of HVS. Factors that affect these values include the acceleration of supply, the cyclical peak of occupancy levels, hotel values exceeding replacement costs, and the inevitable rise in mortgage interest rates. Based on 2013 feasibility studies, HVS projects supply growth of about 1.5 percent two or three years out into the future.

Right now is a good time to build, Rushmore added, because it’s cheaper than buying an existing hotel. “What happens though is value is increasing faster than cost, and the distance between value line and cost line is getting larger. That will peak out at some point in time.” The impact of interest rates is the big unknown-an increase in interest rates by 1 point creates an almost 12 percent decline in value, Rushmore said.

Rising trends in the U.S. hotel industry have driven strong employment gains across the travel and tourism sector, hitting nearly 8 million jobs in April. But despite travel’s increasing importance in driving economic growth and job creation, the industry still competes for attention in Washington, Loews Hotels & Resorts Chairman Jonathan Tisch stressed.

“Right now, every industry in America’s service sector is battling the same headwinds—the misperception that our jobs are not as critical to our country’s future as jobs in other sectors,” Tisch said. “We need to unite together to transform this mindset.”

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