Yes, the recovery was slow and erratic but 2014 is shaping up to be a great year as we begin the summer and there is no reason the momentum will slow next year or anytime soon. Sure, there is always some type of uncertainty regarding expenses, e.g. the impact of minimum wage bills and the living wage movement on labor costs or healthcare costs and the impact of Obamacare, but in the short term it is mostly good news. And there is always the possibility that an "event" of some sort could dramatically disrupt things, but here is what is going on in key areas of the hotel industry.

Travel and tourism is the world's biggest industry, representing 9 percent of the global gross domestic product, or 260 million jobs, according to Hilton CEO Chris Nassetta during his remarks that kicked off the ALIS Conference earlier this year. Nassetta went on to say that more than 1 billion people traveled outside of their country's borders during 2012, doubling the same metric from 20 years prior. And even more astounding, "it will (double) again in the next 20 years," Nassetta said.

For the tourism industryin the United States to take advantage of this worldwide trend, Nassetta's solutions were:

  1. Support effective marketing efforts, specifically Brand USA
  2. Reduce visa wait times
  3. Expand the visa waiver program
  4. Modernize the visa application process
  5. Make borders more welcoming

And while the ALIS Conference had a positive vibe, it was nothing compared to the Meet the Money Conference!

At this year's Meet the Money Conference held in LA by JMBM at the beginning of May, STR's Vail Brown imparted some impressive statistics:

  • Several revenue records were set in 2013
  • Q1 2014 RevPAR is up 6.8 percent, supply is up only 1.2 percent and demand is up 2.3 percent
  • Average rate growth in gateway cities is particularly strong with San Francisco up 12.3 percent in Q1 2014

Mark Woodworth of PKF also shared equally striking data:

  • Demand has recovered in 45 of the 50 top markets
  • Occupancy levels are up 4 years in a row
  • Average rates are 95 percent back to where they were at the peak in 2007

Given our recent economic history including the fiscal cliff and S&P downgrade of the U.S. economy, this is very good news. While gross domestic product was disappointing at 1 percent in Q1, it turned up in March and is forecast to continue an upward trend throughout 2014.

Greg Hartmann of Jones Lang LaSalle indicated that private REITs, foreign investors and public markets are the primary driving forces of investment in today's hotel industry. He focused his remarks on aggressive lenders and buyers from China and South Korea. 2010 started the uptick in RevPAR and we have seen a "great debt recovery" recently.

Both Hartmann and Alan Reay of Atlas Hospitality Group talked about deal flow. It is clear from their remarks that hotel real estate investors unleashed capital and aggressively bid on assets throughout 2013. Both Hartmann and Reay were of the belief that transaction activity would improve this year.

According to Steven Rushmore, Jr. of HVS, values will peak in 2015 and interest rates will slowly increase as this economic recovery continues. New supply will become a factor as Steve's work doing feasibility studies gradually has recovered. His most shocking report was on the "real" cost of franchising that put costs at nearly 18 percent of revenues for some franchisors.

Meet the Money

Supply growth is beginning to be a concern and will drive down ADR growth if not held in check. None of us had answers as to how to hold it in check and most of us were considering building more hotels! The debt markets are starting to get a bit frothy, with incredibly low interest rates, high loan to values and very aggressive and competitive lenders.

While the fundamentals are good for now, there are some headwinds like labor costs and health care costs as mentioned above. Other concerns are rate transparency, pricing power in the hands of fewer people due to consolidation, brand creep and higher interest rates.

The Lodging Industry Investment Council's (LIIC) Mike Cahill gave his David Letterman-style Top 10 Trends List:

10. Obamacare

9. True group demand including meeting space

8. Quality of hotels for sale is down, quantity is up

7. Time to develop, better to build than buy

6. Marriott has the best rewards program, well above HHonors at 52 percent to 13 percent

5. Hotel lenders back and aggressive

4. Volume of transactions will increase

3. Equity rates headed south

2. Values going up

1. 5th to 6th inning, most like 2005/6 (compared to a baseball game)

Having said that, PhoCusWright just came out with their report on 2013 and led with this positive statement: "Millions of U.S. adults who skipped out on vacations over the past few years finally felt confident enough to book in 2013," says PhoCusWright senior analyst, Marcello Gasdia. "This is a much welcomed improvement for the U.S. leisure travel market. There is no doubt that travelers are feeling more confident these days. Many are already planning expensive vacation schedules for 2014."

Baby Boomers drove the recent improvement in leisure travel incidence. Nearly half of this age group went missing from the travel marketplace in the years following the recession. But this hard hit demographic is quickly regaining their footing, with roughly 60 percent taking leisure trips this past year.

New York University Investment Conference Notes

The NYU Conference seems to have begun the irrational exuberance phase of the lodging cycle. At Meet the Money, just four weeks earlier, speakers talked about the next two years being very strong. NYU took it to a new level and talked about the next "several" years if what I am hearing anecdotally is true. I sure hope they are right. Some of this seems to be based on the theory that the recovery was so slow to materialize. But I do get concerned when our industry starts acting like it is 2004 and the action is just beginning.

The negative vibes coming out of NYU were commoditization of our industry, increased costs of doing business (via third-party distribution channels) and diminished relationships with our guests who do not book with us directly. I cannot disagree but third-party channels can be managed.

The HotelGuru's Analysis

Based on all of this positive data and other industry metrics that have come out recently, here is my analysis of the situation.

Revenues

The Chinese are coming. The emergence of more than 1 billion Chinese into the global middle class over the next few decades will be the driving cultural force of the 21st century. It is difficult to understate the importance of tourism in that equation. The tourism industry employed over 260 million people and earned $7 trillion in 2013, accounting for over 9 percent of the world's economy and 9 percent of its workforce. Chinese tourists took 83 million trips in 2012 and spent $102 billion overseas (up 40 percent from 2011), making China the largest source of tourists worldwide. According to multiple sources, China's business travel market—hotels, airports, rental cars, etc.—will overtake America's by 2016, and China will be the world's largest overall tourist economy by 2027.

Group business is making a comeback. While group demand has been uneven for several years, there are real signs of average rate growth in that sector according to PKF. LIIC reported that true group demand and meeting space is up this year as well.

Corporations are loosening up their pocketbooks and have huge amounts of cash on hand. Leisure travelers have more disposable income than in any recent year and Millenials are starting to travel in abundance.

Net Income/Value

According to the 2014 edition of Trends® in the Hotel Industry, an annual report recently released by PKF Hospitality Research, LLC (PKF-HR), hotel profits in 2014 are on pace to exceed pre-recession levels.

All property types enjoyed an increase in profits during 2013. For the year, Net Operating Income for the average hotel in the Trends® sample grew by 10.1 percent in 2013. Resort hotels enjoyed the greatest gains at 11.9 percent followed by full-service properties at 11.5 percent. Following behind the overall average profit growth rate were suite hotels without F&B at 7.9 percent, limited-service hotels at 6.8 percent, and suite hotels with F&B also at 6.8 percent.

Convention hotels achieved a profit growth of 8.2 percent in 2013. "While this was less than the overall sample average, it is greater than the profit growth these properties achieved in 2012. The increased profitability of convention hotels is consistent with the initial stages of the recovery of the group demand segment that we have observed," Woodworth said.

Millennals

Millennials, age 20-34, represent 79 million people and outnumber even the Baby Boomers. This "now" generation expects immediate gratification because they have grown up with technology that provides instant access to information, according to HVS. This means having access to information in real-time. Their favorite information currency is photographs, which is why successful hotels are those that can share events and amenities through attractive and strategically disseminated photography.

Millennials get their recommendations through social media sites like TripAdvisor and Yelp. For this reason among others, it is critical that hotels utilize a form of reputation management. Millennials are social creatures who enjoy working and playing together while working on laptops or mobile devices and having a beverage.

Mobility and speed of information is key to Millennials who will book rooms on their mobile devices and require less lead time to make a booking decision than any other generation. They are already traveling for business and expect a clean bed, a hot shower and free wifi as basics. They look for interesting experiences which is why we looked to a company to put together an app for us that creates local discounts and flavor.

Our Hilton franchises have several forward-thinking strategies in place to meet the needs and expectations of Millennials, such as the paid premium Internet option, the expansion and upgrade of the eCheck-in experience and specific brand programs such as Hampton's Forever Young Initiative, Hilton Garden Inn's Flourish and Home2 Suites green-friendly practices.

Rankings will rule, wow customer service is required and sustainability is a keyword. Tech savvy is a given and Millennials will become the most important lodging industry customer within 5-10 years, according to Bill Marriott.

Boutique Hotels

Since we operate several high end boutique hotels, we thought we would generate some buzz about our guests. First, we talk to our guests, not to our computers. We are developing a formal pre-, during and post-stay platform of communication and look to provide a "different" experience than the expected brand experience. This brings us to our notion that service is either basic, expected, desired or wow...and we go for wow! Our philosophy is go to the post office for basic service, a standard brand for expected service, a nice resort for desired service but come to us for "wow" service!

According to IDM Team's Sean Skellie, "hipsters" are setting the bar, not just sitting at it. "Hipsters are a subculture of individuals in their 20s and 30s that value independent thinking, counter-culture, progressive politics, an appreciation of art and indie-rock, creativity, intelligence, and witty banter," according to Skellie. We couldn't agree more!

Farm to table is a focus in the restaurant industry so we look to concepts where we can continue to generate profits for our owners but not give up uniqueness for our discriminating guests. These same guests want to feel at home in our hotels, so we have 55 inch TVs in one our super luxury hotels and provide super-premium towels and wifi to go along with the premium rates we charge.

Pre-arrival communication followed by celebrating the experience during and after each visit is paramount to successful boutique hotel operations. As one Meet the Money speaker put it, every team member on property must be a "rock-star." When team member knowledge of the destination is flawless and responses to any complaints are specific, guests take notice. Engaging with guests throughout their stay by qualifying their expectations and providing wow customer service will provide for loyal guests. As an example, send anniversary cards to create an emotional connection with these guests.

San Diego Hotel Market

Everything is finally working for San Diego. After a year of no marketing dollars, occupancy is up, rates are up, new supply is limited and revenue per available room is entering the top tier of U.S. cities once again. Look for 6-7 percent RevPar growth this year and next. Coupled with limited supply, net income and values should be strong. If there are clouds on the horizon, they are on the labor cost side. Yes, minimum wage could spike markedly. May sane minds prevail as a significant increase in minimum wage will benefit servers who already make approximately $30 per hour when accounting for tips and hurt teens looking for that first "training" job.

The Take Away

So, it is the beginning of the 6th inning which means time is starting to run out on this economic expansion. Lock in good interest rates and make sure all your properties are renovated to take advantage of rate growth. Push revenue management and average rates hard, identify profitable distribution channels, work the social media marketing and web strategies aggressively and reign in expenses while keeping your team members happy so that they can provide that incredible service that keeps guests coming back. That will leave you with net income and value...the stuff that creates smiles for owners!

About Robert Rauch

Robert Rauch, President, is a nationally recognized hotelier serving clients in all facets of the industry. He founded the website Hotel Guru, publishes Hospitality Innsights, an electronic newsletter, and is a Faculty Associate at Arizona State University.

Contact: Robert Rauch

rauch@hotelguru.com

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