In 2014, the tourism industry has recovered ahead of the economy for the first time in history. This is unusual considering the lodging industry has run in sync with all major economic trends in the past. We have continued to experience steady growth in 2014 and according to STR and Tourism Economics revised forecast, hotel demand is predicted to increase 3.6 percent for the year. Experts predict that both rate and occupancy numbers will remain strong and hotels will continue to see gains during Q4 and into the New Year.
Lodging Industry Forecast 2015
The pace of economic growth is not robust, however, it will drive improvement in hotel performance within the U.S. in 2015, just as it has been doing in 2014. Development has been minimal and 2014 has shown growth of approximately 7 percent in revenue per available room (RevPAR). While development activity progresses, average rate growth should help keep us moving forward at a 6-7 percent RevPAR clip. This pace will allow net income (NOI) to rise at a double digit pace, fueled largely by average rate growth going forward. In 2013, NOI grew at 15.4 percent according to PKF Consulting. This has had an enormous impact on valuations because the two primary drivers of value are net income and capitalization rates (cap rates). Cap rates have been stable as interest rates have remained low.
At the end of Q2 in 2014, more than 85,000 rooms were under construction in the U.S., according to Lodging Econometrics, an increase of 27 percent from the previous year. However, projects underway represent 1.5 percent of supply, lower than the long-term average of closer to 2 percent. Based on this newly limited supply, we see growth of demand at 2.5 percent increasing occupancy by one percentage point and average rate growth of 4 percent. This 6.5 percent RevPAR growth should continue for the next two years.
We believe that valuations of hotel assets will improve by about 25 percent to hit a peak at the end of 2015. This will be made possible if two things occur: 1) NOI continues to grow by double digits, which we predict it will for the next two years, and 2) cap rates, driven largely by interest rates and economic conditions, stay where they are. For hotel owners who are looking to optimize cash flow and values without waiting too long to sell, this is crucial. As a buyer or developer, purchasing in 2015 allows you to ramp up earnings for a refinance at the end of 2016 with a new or purchased asset before the next economic downturn.
The return and positive increases in group business have helped stabilize the industry and have provided us a platform for building base business. According to TravelClick, we can expect the already strong transient segment to improve while group will continue it’s recovery.
The bottom line is our forecast calls for an overall increase of 2.5 percent in demand and 5 percent in average rate with a 1.5 percent increase in supply and REVPAR growth of 6.5 percent next year.
Increasing travel to popular leisure destinations and a recovering statewide economy are driving occupancy gains in California. In Anaheim, fueled by Disneyland, room nights have jumped by over 3 percent year to date with strong rate growth in 2014. The San Francisco Bay Area is flying high and leads the nation in average rate and occupancy growth. The Los Angeles metro area has some very strong sub-markets as does San Diego.
Due largely to a fight between former Mayor Bob Filner and the San Diego Tourism Marketing District, San Diego was up less than 5 percent in 2013 but with funding restored in 2014, the market is up by double digits through July of 2014. Full disclosure, I predicted very early on that then Mayor Filner would turn out to be the worst mayor in the history of the U.S. and he fulfilled that prediction. No funding in San Diego showed how important promoting tourism is.
The 2015 predictions will be supported by the increases in popularity from international travel such as the Chinese, the continuing recovery of the U.S. economy and the increase in consumer confidence. We are confident that the industry can expect to see strong growth across the board in 2015.