REPORT FROM THE U.S.—Another strong year of performance indicates the U.S. hotel industry remains on solid footing, keeping the door open for further investment.
During a recent webinar hosted by Marcus & Millichap titled “Hospitality investment forecast,” panelists shared their outlooks into the near future of the U.S. hotel industry.
A stronger U.S. economy has created opportunities and challenges for hotel companies, said John Chang, SVP of research services at Marcus & Millichap.
One result of that is increasing wages, which can be both a blessing and a curse, he said. Higher wages generally mean people can afford to travel and spend more, but for hotel companies they also represent a growing concern with controlling costs.
Chang said consumer confidence is driving leisure travel demand, and small business and CEO confidence are both elevated, which drives business travel.
“We have a very, very strong environment that’s supportive of the hospitality sector across the entire economy,” he said.
On the other side of the issue, if hoteliers want quality employees in their hotels, they’ll have to pay more, said Hitesh Patel, chairman of the Asian American Hotel Owners Association. But it’s also becoming more difficult to find qualified workers due to a labor shortage.
“A lot of times, you’ll see some hoteliers just filling in bodies to get the work done, and you’re not sure you’re getting quality work,” he said.
The growing cost of labor also affects construction, making it more expensive and more challenging to build hotels, said Brian Waldman, SVP of investments at Peachtree Hotel Group.
Strength in the future?
The hotel industry is currently on a long hot streak that has yet to overheat and appears durable, Chang said, but the question is “How much longer is there?”
“How much runway is left? That’s where all of the caution comes in,” he said.
Patel said he’s always on the road for his job, and whenever he travels, every flight is full and the hotels are full. Consumer confidence is up, and people are willing to spend their money on travel. Hoteliers will want to make sure this is healthy growth, he said, but he’s optimistic and believes this trend will rise over the next year or two.
The demand for hotels is phenomenal and occupancy is at peak levels, Waldman said, adding he sees no major storms on the horizon, but there’s always the risk of a black-swan event.
At some point there will be a pullback, he said, which is why Peachtree is positioning itself more defensively as a buyer and seller.
“There’s probably more good days behind us in this cycle than ahead of us,” Waldman said.
What’s being built?
On the supply outlook, hotel construction is concentrated at the upper-midscale and upscale segments, Chang said.
Patel offered a reason for that, pointing out that the cost of building an upper-midscale hotel versus the cost to build a midscale or economy hotel is not that different, but there is a significant difference in the yield in revenue per available room.
He said AAHOA members feel the upper-midscale segment is where they can “get the biggest ROI when developing and purchasing.”
Branded or independent?
In good times, a brand affiliation might not mean as much to some hotels, speakers said.
For example, when there’s peak occupancy, a hotel owner may ask why they would need a brand that costs them 10% to 12% in franchise fees, Waldman said. But when the market pulls back, those same people are trying to figure out how to put heads in beds.
Peachtree is a big believer in brands, he said, adding the value comes from the brand platforms and reservation systems, as well as savings in sales and marketing.
Soft brands do offer some flexibility, Waldman said. They don’t have the same cookie-cutter feel, but still have the strength of a brand behind them.
Brands also play a big part in getting lender buy-in, he said. Many lenders are getting full on hotel construction and are more apt to say no if the project isn’t affiliated with a brand.
Patel said in the downtown area of a major market, there isn’t as much need for a hotel to fly a brand flag. That’s different in a tertiary market, where a hotel likely wouldn’t have the walk-in traffic, he said.