The U.S. Hospitality Market: 2011 & 2012
A step in the right direction
By Roger G. Hill Chief Executive Officer & Chairman, The Gettys Group Inc. | December 11, 2011
It's no secret that 2011 was a complex year for the hospitality industry, and you can fully expect that 2012 will be no different. We started this past year with the strongest transaction activity since 2007 and a momentum that inspired both our colleagues and peers with the hope that, after reaching rock bottom, we were once again on the ascent to recovery. Even well into April, we continued to be encouraged by signs of growth.
This early trajectory seen in 2011 was due in large part to properties changing hands, from conversion projects and new branding efforts, to shakeups in management. Real Estate Investment Trusts (REITS) had the upper hand during this time and were busy acquiring hotels for their portfolios.
As many know, there is always ample risk involved with buying a hotel. Frequently, buyers agree to purchase a hotel before even heading to an investment bank and raising the necessary funds that will eventually cover the cost of the deal. If they happen to be a REIT they could then turn around and sell stock at market price, or slightly below, and use these proceeds to buy hotels. Although their shareholders may receive just three or four percent return on the actual investment, they are anxious to accept this deal in today's low yield investment climate. While we may have seen higher returns just a few short years ago, at present, both our standards and yield scales are much different.
In September, I was in Phoenix attending the Lodging Conference where I met with many hospitality industry leaders. The good news is the attendees were feeling optimistic about the coming year's potential. Many of them, myself included, felt that the hospitality market would continue on a positive trend as evidenced by continued U.S. Revenue per available room (RevPar) growth.
The results of the recent Request For Proposal (RFP) season will serve as a strong indicator for how 2012 booking rates for large groups will shape up. While increasing group sales remains a struggle for many hotels and resorts, there is still clearly a need to continue focusing on these efforts. In this post-ING era, off-site meetings and incentive trips have decreased noticeably, yet organizations still recognize their value for gathering executives together in one place to strategize and plan for the future. From increased team building and creative idea generation to reduced distractions, corporate planners understand the benefits of hosting well-planned off site meetings and will continue to work them into their annual budgets.
During the pre-recession years of 2005 to 2007, there was significant turnover in hotel ownership, often at top-dollar prices. This meant that many hoteliers did not spend the discretionary funds needed for necessary capital improvements. Understandably, this led to frustration among the licensees who wanted to fix existing problems that would enable their hotels to meet quality standards for design, operations, and customer service. In response to the recent financial crisis there was an initial "grace period" granted to owners on non-essential improvements, giving hotels some leeway, but that grace period has now expired. Currently, we are seeing that many brands are requiring licensees to update hotels with new, improved brand and design standards, or face the consequences of losing the hotel's flag.