HOTEL MARKET REPORT: 4Q2013 SLOW BUT SUSTAINED GROWTH FOR 2014 FORECASTS REMAIN POSITIVE FOR THE HOTEL SECTOR, WITH A CAUTIOUS EYE TOWARDS CONSTRUCTION DEMAND: Demand trends continue to slow, but remain above the long-term average. During the recovery, the demand comeback was led by the business and transient sectors, with group travel lagging. The question remains as to whether group demand will see a recovery in 2014. OCCUPANCY: After improving very rapidly during the recovery, occupancy levels have moderated. With the construction engine restarted, 2014 forecasts indicate slower occupancy growth for the year. ADR: Record demand levels in 2013 helped drive an ADR increase of 3.9% for the year. While strong demand and occupancy gains led the hotel recovery, ADR is expected to be the key determinant of RevPAR growth in 2014. RevPAR: Over 2013, RevPAR rose to its highest ever level of $70, a 5.4% increase over 2012. Room revenue of $122 billion was also at an all-time high, posting a 6.2% increase compared to one year prior. SUPPLY: New supply introductions have not surpassed demand; however, specific markets remain a concern. Looking towards the coming years supply will play a larger role, especially among higher chain scales. SCALES: Over 2013, the strongest demand growth occurred within the Midscale and Upscale segments, but both categories also saw supply accelerate faster than the other scales. 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: With record demand levels behind us in 2013, some are wondering if the hotel sector has reached a peak. Expectations from our sources are on the positive side, with continued RevPAR growth in the range of 5.3% to 6.6% for 2014. As room night demand moderates, hotel experts agree that the key determinant in RevPAR growth will be ADR levels. While supply levels should be monitored, we anticipate slowing occupancy levels, steady ADR increases, and sustained RevPAR growth for the hotel industry in 2014. Hotel Market Results Metric 2012 2013 2014 Projection Occupancy 1 61.4% (+2.5%) 62.3% (+1.5%) 63.0% (+1.1%) ADR 1 $106.10 (+4.2%) $110.35 (+3.9%) $114.98 (+4.2%) RevPAR 1 $65.17 (+6.8%) $68.69 (+5.4%) $72.33 (+5.3%) Supply 0.5% Increase 0.7% Increase 1.2% Increase Demand 3.0% Increase 2.2% Increase 2.3% 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. 2014. The PNC Financial Services Group, Inc. All rights reserved.
SLOW BUT SUSTAINED GROWTH FOR 2014 2 SUPPLY GROWTH WILL PICK UP IN 2014, BUT SHOULD REMAIN IN CHECK While occupancy levels are moderating, room night demand continues to outpace new supply growth. Over 2013, room night demand increased by 2.2% compared to a 0.7% expansion in supply (STR). As of year end 2013, Marcus & Millichap placed the pipeline of rooms under construction at 2.0% of existing inventory and estimated approximately 30,000 additional rooms in the planning stages. For 2014, we expect overall supply levels will pick up, but they should remain below historical levels for now. While current supply growth does not present a significant concern, lenders will need to carefully assess each hotel project. As stated in previous reports, we remain very cautious in markets such as New York City, Nashville, and Washington, DC, where coming supply additions represent a large portion of the existing hotel stock. Total U.S., Supply & Demand % Change, 12 MMA 1/1990-12/2013 Source: Smith Travel Research HAS HOTEL REACHED A PEAK? With RevPAR metrics reaching all time highs in 2013Q4, many are wondering if the hotel segment has reached a peak. Projections from STR, PwC, and PKF all indicate continued ADR expansion, at rates higher than what was seen in 2013; however, due to slowing occupancy levels, RevPAR growth is not expected to be as strong over 2014 and 2015. According STR data, ADR levels bounced back at a much stronger pace following the last downturn, posting 7.5% growth for 5 consecutive months beginning in October 2006. However, for the most recent cycle, ADR did not gain nearly the traction reaching a high of 6.1% in February 2011, and leveling out at 4.3% by January 2013. Sentiments are mixed, with some hoteliers indicating lost ADR and others expecting significant rate gains in the coming year. With occupancy expected to remain steady, we are less convinced of the ability to drive ADR higher. Nevertheless, it will be interesting to watch the trends unfold over the coming months.
SLOW BUT SUSTAINED GROWTH FOR 2014 3 SEGMENT PERFORMANCE METRICS Source: Smith Travel Research Demand Over 2013, room nights sold (demand) increased by 2.2%. This was down from the 3.0% expansion tracked in 2012. Gains for 2013 were recorded across all scales, and the Upscale category led with a 4.5% increase in demand. All geographic regions improved, with the West South Central and Pacific regions both reporting the largest gains at 2.8%. Looking at the locational sub-classifications, Airport and Urban locations were the leaders, with 2.9% and 2.7% increases, respectively. As we move through 2014, hotel operators will be looking for a clear recovery in the group demand segment. There have certainly been some positive trends reported recently, with Ed Walter, Host Hotels & Resorts President and CEO, indicating that group revenue grew by 6.0% for the most recent quarter, with group room rate up by 3.0% and room nights sold up by more than 3.5%. For 2014, he said that the group booking pace is up 3.0% for the year and 70% of expected group rooms have already been booked. Additionally, Marriott International CEO Arne Sorenson said that the company s North American group sales organization booked $3.4 billion in new group business in 2013 (for future periods), eclipsing the prior record from 2007. Also, group revenue so far in 2014 is running about 4.0% higher than 2013 levels for the Marriott brand. Occupancy Demand continued to outpace supply in 2013, and the market recorded a total occupancy gain of 1.5% for the year. All segments reported increases, with Luxury and Midscale leading the way, both at 1.8%. Occupancy levels vary significantly between the product classes, with the top three scales reporting at 71% or higher and the bottom three below 58%. Upper Midscale remains the mid-point of the scales, posting 63.8% occupancy. Within the locational sub-classifications, Airport hotels reported the largest gain of 2.6%, and also the second highest occupancy at 69.8% (Urban hotels led at 70.5%). Average Daily Rate Record demand levels in 2013 helped drive ADR gains of 3.9% for the year. While strong demand and occupancy gains led the hotel recovery, ADR is expected to be the key determinant of RevPAR growth in 2014. In 2013, Luxury hotels by far posted the highest rate gains at 5.6%, with Upper Upscale and Upscale at 4.3% and 4.1%. Transient room rates have led ADR growth, but industry experts note signs of a recovery in group demand for 2014. RevPAR Over 2013, RevPAR rose to its highest ever level of $70, a 5.4% increase over 2012. Room revenue of $122 billion was also at an all time high, posting a 6.2% increase compared to one year prior. Luxury reported a 7.5% gain in 2013, maintaining a lead over the other scales. All but three of the top 25 markets showed year-over-year RevPAR growth, led by Houston (+13.8%) and Nashville (+13.4). Washington, D.C. was the worst performer of the top 25, reporting an overall -1.7% loss in RevPAR for the year, reflecting a 2.2% occupancy loss, but tempered by a small 0.5% ADR gain. Nationally, RevPAR is projected to slow in 2013, with estimates ranging from 5.3% to 6.6% in 2014, with moderate increases in occupancy, and driven primarily by ADR growth. Supply Room supply expanded by 0.7% in 2014. Although increasing, the rate remains below the long-term average of 1.9%. While overall expectations are for construction deliveries to remain in check, construction has ramped up and we will see increasing room supply growth over the coming 2 years. Across the scales, the largest expansion of supply is concentrated in the middle segments (Upscale and Upper Midscale). SUPPLY JANUARY 2014 Chain Scale Existing Supply In Construction Active Pipeline Jan 2014 % Jan 13 Jan 2014 % Jan 13 Jan 2014 % Jan 13 Luxury 107,666 +0.1% 4,577-3.3% 7,367-7.2% Upper Upscale 563,809 +2.3% 8,048 +13.6% 24,358 +58.8% Upscale 609,801 +3.5% 35,721 +38.6% 96,348 +17.0% Upper Midscale 866,673-0.3% 28,906 +46.4% 99,280 +12.6% Midscale 484,836 +1.5% 5,100 +51.1% 21,130 +7.8% Economy 773,093-0.2% 1,167 +20.9% 4,179 +4.4% Unaffiliated 1,533,829 +0.1% 13,329 +21.8% 105,107 +16.9% Totals 4,939,707 +0.8% 96,848 +33.4% 357,769 +16.4% Active Pipeline includes in construction, final planning, and planning stages Sources: Smith Travel, CBRE-EA Construction Pipeline, PNC Real Market Estate Research
SLOW BUT SUSTAINED GROWTH FOR 2014 4 Projections For 2014, forecasts provided by Smith Travel Research (STR), PKF, and PwC all have positive expectations for occupancy, ADR and RevPAR. Currently, projections range from 5.3% to 6.6% in anticipated RevPAR growth in 2014. As occupancy levels are moderating, all of the forecasts are looking to ADR expansion to drive most of the growth in the RevPAR metric. Projections released from Hilton and Marriott anticipate similar 2014 RevPAR growth among their chains, with Hilton forecasting 5.0%-7.0% and Marriott indicating 4.0%-6.0%. The STR, PKF, and PwC projections are outlined below: Hotel Market Projections Smith Travel PKF PwC 2013 (Actual) 2014 2015 2014 2014 Occupancy 62.3% (+1.5%) 63.0% (+1.1%) 63.3% (+0.5%) 1.8% Increase 63.2% (+1.4%) ADR $110.35 (+3.9%) $114.98 (+4.2%) $119.81 (+4.2%) 4.8% Increase $115.31 (+4.5%) RevPAR $68.69 (+5.4%) $72.33 (+5.3%) $75.73 (+4.7%) 6.6% Increase $72.82 (+6.0%) Supply 0.7% Increase 1.2% Increase 1.6% Increase 1.2% Increase 1.0% Increase Demand 2.2% Increase 2.3% Increase 2.1% Increase 3.0% Increase 2.4% 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 MARKET PERFORMANCE METRICS Construction Supply expansion began declining in 2009, and bottomed in 2012. While we saw new hotel starts move higher in 2013, overall construction levels remain constrained, and the current pace of supply growth for 2014 and 2015 (estimated at about 1.0%) is below the long term average of 1.9% (STR). Last quarter, we highlighted markets that are at risk of oversupply, with coming additions topping 2.0% of existing hotel stock (NYC, Denver, Nashville, and Miami were several of the more significant increases). In October 2013, Smith Travel presented data showing the rate of change in the number of rooms under construction within the top 26 Markets (see chart below). Currently, Dallas, St. Louis, Houston, and Seattle have the most development interest, with construction levels increasing more than fourfold. Additionally, Los Angeles and Anaheim hotel construction is set to nearly double. Interestingly, there are no hotels currently under construction in Las Vegas. As noted by STR in a recent article from HotelNewsNow.com, this is remarkable, considering how many rooms were added to the metro over the past 10 years. However, the article also mentions that several projects are in the preliminary planning stage, and eventually one of the projects will find the financing needed to proceed to groundbreaking.
SLOW BUT SUSTAINED GROWTH FOR 2014 5 Top 50 Market Performance The chart below plots performance metrics for the 50 largest hotel markets in the country. The change in occupancy from 2012 to 2013 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 seen in the chart below, Miami is one of several overachievers among the Top 50 markets, with ADR growth of 8.1% and occupancy gains of 1.8% through 2013. Market participants credit the strong performance to Miami s status as a global destination, with a burgeoning influx of international tourists. However, with nearly 2,000 new rooms underway, Miami is set to see an increase of over 4.0% to its existing hotel supply over the coming 2 years. It will be interesting to see if the strong market fundamentals will hold up amidst the new inventory. Washington, DC is also recording a significant number of new hotels underway a total of 2,767 rooms, representing a 2.6% increase to existing supply. However, 2013 RevPAR is both lower than it was one year ago, with an annual decline of -1.7%. All considered, Washington, DC remains one of the riskier markets for new hotel development. Source: Smith Travel Research
SLOW BUT SUSTAINED GROWTH FOR 2014 6 SALES VOLUME AND CAPITALIZATION RATES Hotel investment totaled $7.1B this quarter, up 32.0% compared to last quarter, and up 2.0% YOY. Full-service hotels remained the favored subtype at $5.2B, accounting for 73.7% of total 2013Q4 sales. Mixed final quarter results should not detract from the overall positive trends for hotel in 2013, as total transaction volume for the year was 32.5% higher than 2012. Full-service hotel prices rose 11.0% during the year, bringing the sector to within 9.0% of peak level pricing. Prices were up 33.0% for limited-service hotels, narrowing the gap with fullservice, but they remain 25.0% below peak levels. Asset transactions, such as the Hyatt Regency Orlando Convention Center and the Park Lane Hotel in New York are proliferating in this sector, evidencing investors growing appetite and their ability to access capital. Hotel Sales Volume ($ Billions) Through 2013Q4 $35 $30 $25 $20 $15 $10 $7.1 $5 $0 01 02 03 04 05 06 07 08 09 10 11 12 13 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 30 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 43 bps decrease in full service hotel rates from 8.10% to 7.67% and a 17 bps decrease in limited service transactions from 8.66% to 8.49%. 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 have stabilized. 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. 13% Capitalization Rates Hotel - United States Through Fourth Quarter 2013 12% 11% 10% 9% 8% 9.60% - PwC Limited Service 0 bps, 0.0% 8.00% - RERC Hotel 0 bps, 0.0% 8.02% - PwC Full Service 0 bps, 0.0% 7% 8.17% - RCA Hotel 8 bps, +1.0% 6% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: PwC Real Estate Investor Survey (published semi-annually), Real Capital Analytics, RERC, PNC Real Estate Market Research