Mr. Guinn

Hotel Market Reports

2007 U.S. Hotel Industry Outlook: An Optimistic But Cautionary Tale

By Clyde Guinn, Senior Vice President, Stanford Hotels

All the lodging metrics appear to tell us that 2006 was a remarkable year for the industry. On average, room demand has steadily increased month over month and room rates and occupancy are up from 2005 - yielding a third consecutive year of revenue growth for U.S. hotels. And, it appears that each sector from full-service to limited has reaped the rewards.

Reflecting this bullish perspective, hotels were a hot investment commodity and everybody from large investment firms to small REITs snapped up properties in key markets this year. Moreover, new construction has been constrained by an exponential increase in development costs, thereby limiting future competition and increasing the equity of existing supply.

With such a rosy outlook it is easy to forget that industry performance is cyclical. Experience demonstrates that meteoric growth cannot be sustained and will eventually soften or even deflate. In addition, the country's economy has historically experienced a recession in the early part of each decade and clearly the lodging industry will be adversely affected in the likely event that history repeats itself.

And while we have learned a lot from 9/11, and are now better prepared, neither the country nor the industry is yet impervious to the damaging ripple effects of such a terrorist event. Another attack could once again severely limit the demand for lodging accommodations.

What does this mean for hotel owners and operators?

While capital is available during this peak in the cycle, we should now be investing, or re-investing, in our properties. Taking the time and money to upgrade our hotels now, particularly in the technology arena, will set us apart from competition and serve to fortify our portfolios when times are tough.

More importantly, spend time to thoughtfully invest in human assets - our associates. They will play a key role in our success during inevitable market downswings. By creating a positive work environment through quality staff amenities and above-average compensation and/or benefits packages, we can foster relationships that will sustain us should the lodging landscape become grimmer.

Lastly, if we are looking to sell, doing so within the next 12 to 24 months (maximum) would be optimal. Timing the market is, of course, the best way to yield highest returns and it appears we are at or near the peak of recovery for this cycle.

That said, what will 2007 be like?

According to PKF Hospitality Research (PKF-HR), the hotel industry is primed to enjoy its fourth consecutive year of profit growth in 2007. By the close of next year, the average U.S. hotel is expected to achieve an operating profit of $15,996 per available room, up 9.8 percent from the year-end estimates for 2006.

According to Smith Travel Research, Revenue Per Available Room (RevPAR) is expected to grow from 8.5 percent in 2006 to 8.9 percent in 2007. While recent RevPAR increases may be somewhat smaller than past year comparisons, they are still very strong numbers. And, it is important to note that while occupancy will experience some growth in most markets across the country next year, expanding room rates will be the real champion in driving RevPAR and profitability in 2007.

Current statistics indicate that while the pace of growth may be slowing into the next year and beyond, average annual rates for occupancy, Average Daily Rate (ADR), RevPAR, and demand will be above the historical long-term averages posted from 1988 through 2005.

Further bolstering these numbers is a limited supply of new hotel rooms in the pipeline. According to Lodging Econometrics, hotel construction projects at the end of the second quarter in 2006 totaled 3,436 with 463,629 rooms-15 percent below the peak set in 1998. Additionally, inventory is reduced by older properties sold for other uses, and the conversion of commercial hotels to condo-hotels.

So while rate of growth amongst performance metrics may be softening slightly, the current margin of supply to demand indicates that the industry's bottom line will remain strong. Industry experts agree that 2007 (and probably 2008) will be a very good year for hotel owners and operators.

Who's hot, who's warm, who's not?

While statistics show that the hotel industry is showing growth across most sectors, upscale, full-service hotels in major urban markets are particularly strong right now. Couple limited supply-side growth in this sector with favorable occupancy and room rate trends, and the duo yields a powerful return on investment. Recent factors hindering development in this realm, including increasing community resistance and cost to build, have swung the pendulum from excess supply towards demand.

In the after-math of prohibitive up-front costs of building full-service hotels, many developers are now turning to mixed-use projects that combine both a lodging and residential component. Financing for a large, proposed hotel project becomes easier when a residential element is planned as it placates lenders fears and helps projects pencil out both in the short- and long-term.

Boutique hotels are another highly prosperous sector. Guests looking for a more individualized experience than major brands are flocking to these properties. With a strong loyalty from Generation X, boutiques are popping up in increasing numbers in major urban centers.

Very mature limited-service brands are one sector not fairing as well. With a substantial increase in today's lodging choices, guests are no longer won over by older brands with less to offer. The original guests of older brands with limited service, who generally made conservative decisions based on affordability, now have higher incomes and are choosing more upscale hotels for travel.

What are the 2007 trends to watch?

PKF-HR forecasts that gains in other sources of revenue - things like food, beverage, retail and recreational - will outpace those from room revenues for 2007. Historically, this trend existed and is now re-emerging.

One revenue source of particular note is the hotel restaurant and bar. Current food and beverage trends indicate that successful hotel dining options are no longer 'hotel restaurants' but signature restaurants located in hotels. The distinction is evident in hip, ambitious restaurants that are treated as stand-alone establishments and appeal equally to the local community as well as the visiting hotel guest.

Another notable trend is the increasing impact of Customer Loyalty Programs. Opponents of these often-expensive programs may argue that the benefits do not outweigh the cost and question whether they reward the right people. While it is difficult to track if the 'right' people are rewarded, our experience shows that smartly designed and well instituted programs are very successful in driving the number, and caliber, of repeat guests - particularly the coveted business traveler.

Furthermore, brands utilizing Customer Relationship Management systems (CRMs) to track specific guest preferences will be the ultimate winners when the inevitable downturn in the cycle occurs. Hotels that have established strong brand loyalty will be buoyed during less prosperous times by the relationships they have nurtured over time.

Lastly, hotel owners looking to gain a competitive edge will pay close attention to trends in technology, and invest accordingly. Guests want to customize their hotel room experience, and expect to have the same benefits of home while away. Technology will play an increasingly important role in guest loyalty.

Recognizing the significance of technology, Stanford Hotels will invest more than two million dollars to bring GuestLink and 42" plasma televisions to its new rooms at the Hilton Washington Dulles Airport, Waikiki Prince Kuhio, Sheraton Gateway SFO Airport, and Sheraton Albuquerque hotels. This technology allows guests to easily plug in their chosen content - mp3, iPod, DVD player, laptop, digital camera, etc. - into a large, flat screen television.

With such a positive outlook, are there areas of concern in 2007?

In part due to the sudden focus on enforcement of immigration laws this year by the Department of Homeland Security, the issue of immigration gained much attention, and will continue to be a hot topic in the coming years. Because the hospitality industry is a large employer of immigrants, it is particularly vulnerable to government scrutiny and sanctions.

What should hotel owners and operators be doing in response? First, it is important to consult your legal department to take measures to ensure compliance with federal and state laws. Second, learn how your local and regional politicians stand on immigration issues, and get behind those with whom you agree. But, be careful to understand cause and effect in their proposed legislation.

According to PKF-HR, increased operating costs are another issue that hotel owners will face in 2007. These cost issues are forecast to surpass 5 percent - a number exceeding inflation. Labor-related costs in U.S. hotels are going up quicker than revenues are growing. This equation may mute profits, mitigated by how efficiently operational costs are managed.

Increased operational expense can be explained by any one of the following - rising energy and utility costs, higher franchise royalties, greater property taxes and insurance fees, among others. Ultimately, as an operator you must take a look at your margins and ask yourself if you are as efficient as you can be in the areas under your control.

The good news is, barring any unforeseen dramatic circumstances, industry experts foresee that as the current recovery cycle approaches its peak, the fall-off in performance on the other side will be less dramatic than in the past. Economic fundamentals and current practices by lenders, developers and operators point to prolonged levels of high performance with moderate variation.

Clyde Guinn is a Certified Hotel Administrator with 30 plus years experience. Upon completion of an undergraduate degree, he served with Marriott in Washington, DC, New Orleans, and Houston. Later opening the first Adam's Mark hotel as director of sales in Houston. He served as AVP of sales and marketing for the Adam's Mark brand and as GM in Kansas City and Charlotte, N.C. Guinn opened the Kansas City Marriott Plaza as GM. He joined Radisson Hotels Worldwide in 1991 as regional vice president and in 1997 he was promoted to senior vice president. Mr. Guinn can be contacted at 415-398-3333 ext 224 or cguinn@stanfordhotels.com Extended Bio...

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