ATLANTA—According to the recently released March 2017 Hotel Horizons forecast report from CBRE Hotels’ Americas Research, rooms revenue (RevPAR) grew for a seventh consecutive year in 2016, and the prospects for RevPAR growth are projected to be solid for the foreseeable future. What is surprising, however, is the impetus for sustained revenue expansion comes from some unexpected sources, according to the findings.
”The hotel business is cyclical. The upper-priced properties led the U.S. lodging industry out of the recession and have continued to achieve occupancy levels in excess of 70%. However, recently it has been the lower-priced properties that have shown the greatest gains in RevPAR,” said R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research. “In the past five years, RevPAR for U.S. hotels increased at compound annual rate (CAGR) of 5.7%. The only chainscale close to achieving this pace of revenue growth was the economy segment whose average annual RevPAR increase was 5.6% during this period. That means independent and economy chain-affiliated properties have been the primary drivers of the industry’s recent strong performance.”
Looking forward, this trend is expected to continue. From 2017 through 2021, CBRE Hotels’ Americas Research is projecting that the U.S. lodging industry will achieve a RevPAR compound annual growth rate of 2.2%. During this period, the RevPAR CAGR is projected to be 2.8% for the economy chainscale. “We recognize that economy properties still achieve the lowest levels of occupancy and ADR, but investors looking for a ‘growth story’ shouldn’t overlook this segment of the industry while some of the other chainscale categories begin to stall out,” said Woodworth.
In addition to lower-priced hotels, small markets also are enjoying significant RevPAR increases. In 2016, RevPAR growth for the 60 markets covered by CBRE’s Hotel Horizons forecast reports averaged 2.8%. This is below the aggregate 3.6% RevPAR growth achieved by hotels located outside of the 60 markets. The gap in performance is expected to widen in 2017 when Horizons universe is forecast to see RevPAR increase by 2%. Concurrently, the remaining markets are projected to achieve a 3.8% increase in RevPAR during the year.
“So much attention is being paid to the major urban and gateway markets,” said John B. (Jack) Corgel, Ph.D., professor of real estate at the Cornell University School of Hotel Administration and senior advisor to CBRE Hotels’ Americas Research. “Over three quarters of the new hotel rooms forecast by CBRE to enter the U.S. lodging industry in 2017 will be located in the 60 major markets we track, even though these markets represent just 48% of the overall national hotel inventory. The increased competition in major markets certainly helps explain why these markets have recently lagged in RevPAR growth and are expected to continue to suffer in the near term.”
“When you read the hotel trade journals there is a growing sense of skepticism among industry analysts and attendees at the major industry conferences. I attribute this to the large sums of public company money that have been invested in upper-priced properties located in major markets,” Corgel noted. “Economy and independent hotels, as well as the secondary markets, are left off the agenda, so they are they are not top of mind.”
“The fact is that U.S. hotels are achieving all-time record occupancy levels and near record profit margins. A lot of money is being made from hotel operations these days. While the prospects for growth in revenues and profits are moderating, opportunities still exist. Investors just need to investigate some of the historically overlooked chainscale and geographical segments to find better returns,” Woodworth concluded.