Why Hospitality Will Break Records in 2015
SAN DIEGO—Investment in existing and new hotels and increased consumer confidence bumping up travel are just two of the factors leading to the hospitality market’s expected success this year, the London Group Realty Advisors’ Gary London tells GlobeSt.com exclusively. We spoke with London about the hotel industry before R.A. Rauch & Associates’ lodging-industry forecasting event, which he is moderating March 20 at the Hilton Garden Innin Del Mar, CA.
GlobeSt.com: 2015 is predicted to be a record-breaking year across all metrics in hospitality. To what do you attribute this rise?
London: There are several things going on. One, there’s been a trend in investment in existing and new hotels. Investment is coming in from all sources, but one of the major sources that has risen significantly has been foreign money. If you go to some of the major metropolitan markets, you see a lot of money coming in from China. That’s pretty normal across all real estate sectors, which is attributable to the fact that our domestic economy is so strong right now relative to most economies abroad, so they are parking their money in US assets.
On the demand side, the metrics are up for reasons similarly related to the strength of the economy. If you look at hotel demand, there are three sources of this: the general traveler or tourist demand, the business travel and the conference and meeting traveler. This is all up. Businesses and meetings are up because business and commerce have been growing. Similarly, visitor travel is up because people have confidence and are traveling more.
All of these contribute to both the supply and demand side and to the health of the sector. This translates into two areas: occupancies, which are up across the board in hotels and motels, and room rates, which are also up. In rising-occupancy markets, hoteliers can increase room rates, so this differs in different markets.
GlobeSt.com: What do hospitality markets that fare the best have in common?
London: They’re seeing demand rise from all three of these categories. They’re running on all cylinders right now. The markets that are spottier are more dependent on any one or two sectors; they’re not seeing demand from all three sectors. Major business centers are doing especially well right now, whereas secondary regional markets are doing well, but less well. It’s an important segment to the market.
GlobeSt.com: What could potentially derail the success of this sector?
London: The hotel sector is the riskiest of all real estate sectors in good times and in bad times. You have to fill hotel rooms up every night vs. the rental-apartment market where you rent out by the month or year. At some point, the hotel sector is going to be overinvested. We’re seeing spectacularly high amounts being paid on a dollar-per-room basis, particularly in coastal and major regional markets. This is unsustainable, but we have to be in that peaking range right now—we have to be in shouting range of that peak, which means that at some point people overpay for development or purchase of hotels, and there will be some vulnerability at some point. That’s a major headwind.
As far as longer-term headwinds, predicted travel for business purposes is becoming less important. We’re not feeling that yet, but the hotel sector is probably going to be adjusting to that particular headwind soon. When money is tight, which is not the case now, and traveling is expensive, people will pull that expense. They will opt for video conferencing or other communication choices—not every medium requires face-to-face visits, so this can be eliminated during tougher times.
Other headwinds, on the consumer side there’s always the concern about world travel and safety. You see it in the media every day. I think that’s always a headwind, where people get concerned about international travel and safety and security become an issue. Travelers have to deal with this all the time.
Then there’s the overall economic headwind: when the economy starts to slow again, that will quickly impact the hospitality sector. As for the depth of that impact, who knows? Both investors and operators look at these things all the time.
GlobeSt.com: What should readers know about tomorrow’s forecasting seminar?
London: What you’re going to hear at the seminar is a declaration of optimism that is tempered by the concern of how long it will last. There is cautious optimism.