Restrained construction, room demand driving hotels

Marcus & Millichap

Despite economic growth easing slightly during the spring, recent job creation and other improvements in the national economy continue to propel a solid recovery in the hospitality sector. More business-related travel and ad- ditional leisure trips and vacations will bolster room demand and combine to increase occupancy to a shade below 60% this year, the highest level since 2008.

A lack of financing continues to hold down construction, and limited development will persist in the near term. While more than 5,600 rooms were added in New York over a recent 12-month span, few projects are under way in many other large markets. The steady increase in room demand, however, has enabled many property owners to raise the average daily rate (ADR).

As a result, the national market continues to transition from demand-generated revenue growth to a rate-driven expansion, which typically proves more sustainable over the long term. With gains in room demand and revenue persisting, the hotel sector remains firmly on a recovery path, though high gas prices and airfares constitute potential impediments in the near term.

Expanded access to financing and the sector’s recent performance improvements continue to drive a brisk pace of investment activity. As the sector remains in the early stages of recovery, the full upside from strengthening operations has yet to be realized and will spur greater deal volume in the months ahead.

Thus far, large deals involving full-service properties have dominated activity on the national stage. REITs and equity funds continue to take advantage of low-cost capital and recent declines in prices to launch aggressive bids for top-quality hotels in either large markets or high-demand locations, resulting in lower cap rates. Activity among small, private investors remains overshadowed by large transactions, but nonetheless continues to recover solidly.

Limited-service properties with brand affiliations remain a primary target and are offered at a wide range of cap rates generally starting in the low double digits. Opportunities to purchase distressed assets also exist, and additional properties will face refinancing challenges in the coming months.

Job market recovery persists

Nationwide, employers will create 2 million jobs in 2011, a 1.5% increase and a jump from 940,000 jobs added last year. Private-sector employers will lead the gains, while budget restraints will limit contributions from state and local governments.

Hotels fill up, revenues rise in 2011

Limited construction will result in a scant 0.5% rise in available rooms, while room demand will rise 4% on increased travel volume generated by a stronger economy. As a result, national occupancy will surge 200 basis points to 59.6%. Minimal competition from new properties and greater travel volume will support a 4% increase in ADR, while nation- wide RevPAR will rise 7.9% on property own- ers’ improved ability to raise rates.

Peak summer travel season looms

Nationwide occupancy will rise 330 basis points to 68.9% on the strength of a 5.7% spike in room demand. More than 310 million rooms will be occupied from June to August.

The full report is available at .

The national hospitality market continues to transition from demand-generated revenue growth to a rate-driven expansion, which typically proves more sustainable over the long term.

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