Commercial Real Estate is made up of a variety of different property types that are called sectors. Each sector has its own measures. These measures/metrics aid in knowing how the sector is preforming and also in the valuation of the property. The metric used for hotels is fascinating and on the increase indicating that a hotel investment might be a good idea.
Hotel metrics are continuing to show strong numbers through the second quarter of this year. The metric used measures occupancy levels, average daily rates (ADR’s), as well as revenue per available room (RevPar).
Recent data from Moody’s Investor’s Services and Smith Travel Research report that Revenue Per Available room has seen an increase of 7.2 percent year-to-date. To reinforce these numbers, we can look at a separate report by RBC Capital Market that shows REITs have posted average RevPar growth to 6.5 percent. There are markets that are experiencing even larger growth like Seattle, who has a RevPar growth of more than 10 percent.
There was an expectation set by Margaret Taylor, senior vice president with Moody’s. She said, “We expect the (RevPar growth) will continue for the remainder of 2015 and are affirming our forecast for 8 percent to 9 percent EBITDA (earnings before interest, taxes, depreciation and amortization) growth for the industry.”
On top of RevPar growth there has also been growth in occupancy. Occupancy hit the highest rate in this century of 65.2 percent. Also on the rise is the ADR (average daily rate). Lauro Ferroni senior vice president of JLI says, “…the three main reasons hotels are doing so well right now include the increase in international travel, demand for group travel and the small amount of new supply added to the market.” She adds that, “…with group demand, we’re seeing a much longer lead time from people booking rooms. People who are making the decisions have more visibility on the economic outlook and are comfortable committing people to a meeting in early 2017, for example. A year ago, that person would have probably waited until only six to nine months out to book a meeting.”
As the ADR increases to about $100 per room, there is also a direct correlation that is leading to higher property valuations in the hotel sector as well.
Because of the limited amount of available construction financing following the recession there were a very limited amount of new hotels that started construction. This has led to limited supply and there has been an increase in demand. Demand has increased to about 3.3 percent whereas supply will likely only increase 2 percent in 2016, according to Moody’s.
As our society continues to become more and more mobile we can expect to see the hotel sector of commercial real estate remain healthy. If you are interested in commercial real estate it might be the right time to consider adding a hotel investment to your real estate portfolio.
Diana D. Hill