Mr. Hill

Architecture & Design

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.

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.

In today’s market, many franchisees are being encouraged by the hotel brands to enhance their standards with upgrades that include branding strategy changes, renovations, and FF&E upgrades. Individual franchisees are increasingly being required to renovate by the hotel brand. During this cycle, hotel management companies and investors expect owners to meet quality standards and take care of existing and new requests efficaciously, both in terms of cost and efficiency.

In short, many hotel owners must now reinvest in order to maintain brand standards. Frankly, this requirement is very good for our industry and its guests. When hotels meet their obligations to upgrade to new or existing brand standards, the result is almost always enhanced guest experiences, resulting in revenue gains.

In the U.S. the number of hotel opening has been revised downward as construction financing remains limited for new developments. With rooms in construction continuing to remain flat at 1% of existing supply, we will see little occupancy drag from new supply in 2012 and 2013. Deutsche Bank is forecasting net supply growth of 0.2% in 2012 and 0.0% in 2013(1). This will help existing hotel owners by giving them the opportunity to push rate increases assertively as room availability will be at a premium, particularly in primary and secondary markets.

Now, let us shift gears and look forward into 2012. Having been in hospitality for the last 25 years and observing the industry’s fluctuating cycles, I would like to share some predictions for the upcoming year:

1. With increasing frequency, there will be more leisure travelers venturing abroad from China as its economy, and disposable income among its population, continues to grow. Gateway U.S. cities like Los Angeles, Miami, New York and Washington D.C. will be the first of many destinations to attract these visitors.

2. The U.S. government will continue to fund efforts promoting the United States as a vibrant and affordable travel destination. Just recently, the U.S. Travel Association launched their online venture www.DiscoverAmerica.com, the first official travel and tourism website for the United States to actively market itself and be used as a planning resource for consumers. This organization was created not only to attract international visitors abroad, but also to encourage domestic travel.

3. With the price of oil down from its high, consumers will be more apt to increase their travel both for business and leisure purposes. In fact, according to Business Travel News, corporate travel may increase up to six percent in 2012. I expect that the overall costs of international travel will remain steady, although fluctuating exchange rates will surely play a role in this matter.

4. There is no denying that today’s airline industry is challenged—most major airlines are not adding additional flights due to a variety of imposed restrictions, and they are consistently overselling flights. As a result, it will be difficult for some destinations to prosper if consumers cannot easily reach them. The Caribbean is a perfect example of a market whose tourism-centric economies depends predominantly upon airline lift. As a frequent flyer, I can see that capacity is decreasing and self-service is increasing, which in turn gives airlines the opportunity to charge more as there will be fewer flight options available. At any rate, there are no easy solutions for the challenges facing the airline industry today. It comes down to the simple rules of supply and demand: airlines need to cross over the threshold where their fees for fuel, labor, and borrowing costs add up to the addition of flights. However, these flight additions only assist the further growth of travel and tourism. With these persisting issues, the airline industry’s struggles will unfortunately continue to impact both the health and vitality of the hospitality market.

5. We will see a proliferation of independent hotels and reward programs appearing for boutique hotels such as STASH (www.stashrewards.com), the hotel rewards program that enables travelers to fluidly earn free nights at distinctive, independent hotels without blackouts or inflexible category restrictions. Consumers, whether traveling for leisure or business purposes, like to be recognized as individuals when utilizing a hotel’s services and amenities. After all, who doesn’t enjoy special attention? There is value, both real and perceived, at smaller hotels when receiving extraordinary treatment and being made to feel like a VIP guest by the staff.

6. Hotels that embrace the opportunity to make creative use of social media outlets will win with both their current and future guests. This will help the hospitality industry by creating new and creative avenues through which to interact with many different clients. At the same time, Facebook wants to provide a broader platform for travelers looking to visit a particular place or to react to their latest travel excursions. Hoteliers are obliged to take notice as they need to respond quickly: the longer the consumer is unhappy, the greater negative influence this will have on business.

With recent advents in technology and the rising accessibility of information available, consumers now expect to receive final results much more quickly. This growing sentiment now affects consultants across all disciplines as they are increasingly asked to deliver results more expeditiously. Our industry is no exception to this trend—the effects of social media, the World Wide Web, and newly emerging technologies will continue to impact it strongly.

Looking into the crystal ball, we will have to be more flexible in order to keep up with evolving demands. Let’s face it - the world is rapidly becoming smaller as globalization breaks down preexisting boundaries and increases the transparency of worldwide communication and business transactions. The eight hour work day no longer exists—for many it is now a 24/7 experience. You can embrace that thinking and be energized or run from it!

While there is much uncertainty regarding where the overall economy is headed, I am optimistic that the U.S. hotel industry will perform quite well in 2012 due to lack of new supply in conjunction with pricing power as hotel raise rates with higher occupancy levels. That being said the U.S. hotel industry and economy remains at the mercy of congressional impotence on the debt and EU economic disarray.

Reference:

(1). Source: U.S. Lodging Industry Deutsche Bank, 20 October 2011

Nearly 25 years ago, Roger Hill co-founded Gettys, a Top 10 hospitality interior design, procurement and development firm. Under his leadership, Gettys has grown to a global team of business-minded professionals who specialize in hotels, resorts, spas, casinos and mixed-used developments the world over. A respected industry veteran, he is frequently called upon by hospitality and business media outlets to provide insight into the redevelopment, renovation, and repositioning of hotels. A graduate of Cornell University, Roger has served as an appointed delegate for the White House Conference on Small Business, and is a member of ULI, YPO and ISHC. Mr. Hill can be contacted at 312-836-1111 or info@gettys.com Extended Bio...

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