As June rolls around with the NYU Hotel Investment Conference just around the corner, this is a good time to issue a report card for the hotel industry’s first half of the year. I don’t think I would surprise anyone if I said that it has been a B+ year at least with industry recovery in full swing. Why only a B+ you might ask? There are still some pockets of lagging growth in the country and rates should be a few percentage points better.
But from where I sit and glance at the many surveys and predictions that cross my desk, the summer season should be a record one for the industry. Many big cities and resort areas are recording near sell-outs and, in anticipation, summer rates will be going up significantly. We have a sellers’ market at last.
A lot of the reason for the fast return in occupancy and RevPAR can be credited to the lack of supply during the post 9/11 period. Supply has managed to stay light in the first part of our revival period as the industry has played an active game of monopoly, buying and selling properties, with the demand pushing rates per key up dramatically to a point where many developers point out replacement costs are now exceeding new construction costs. So you can be fairly certain we’re going to see a return to development for the remainder of this year and into 2006 and 2007.
Can the market handle this, or are we just asking for more occupancy problems. The pundits all assure us it can.
Most of them that I asked said that despite everyone’s belief that the return of business travel played a key role in the market’s return, it was actually the strength shown by leisure travel that made the early stage of this up-cycle look good. Business travel did return but most companies that cut back on their number of employees in the past down cycle have not been overly aggressive in new employment. But as we get further into this growth cycle, you can look for much of this to return. Also, the outsourcing of jobs around the world has not worked that well and many companies are returning these jobs back into the company. With many of the new hires starting to travel on business, we will see a lot of improvement that will suck up the new-builds for some time to come.
But what about the financing needed to support these projects, especially the big full-service hotels? The condo hotel concept opens the door wide in many major cities and resort areas for the 300-room plus deals. As for the lucrative mid-market, lenders are more apt to go along with a top branded product.