HOTEL INVESTORS SEEKING ways to keep the good times going would do well to consider economy hotels, a recent study shows.
As the industry reported peak performance in 2016 and expects the pace to continue this year, CBRE has discovered the main drivers of lodging gains were hotels in the economy segment.
“Upper-priced properties led the U.S. lodging industry out of the recession and have continued to achieve occupancy levels in excess of 70 percent. However, recently it has been the lower-priced properties that have shown the greatest gains in RevPAR,” said R. Mark Woodworth, senior managing director of CBRE Hotels’ Americas Research.
“In the past five years, RevPAR for U.S. hotels increased at compound annual rate of 5.7 percent. The only chain-scale close to achieving this pace of revenue growth was the economy segment whose average annual RevPAR increase was 5.6 percent during this period.”
The trend is expected to continue. From 2017 through 2021, CBRE Hotels’ Americas Research projects the U.S. lodging industry will achieve a RevPAR CAGR of 2.2 percent overall. But RevPAR CAGR is projected to be 2.8 percent for the economy chain-scale. “We recognize that economy properties still achieve the lowest levels of occupancy and ADR, but investors looking for a ‘growth story’ shouldn’t overlook this segment of the industry while some of the other chain-scale categories begin to stall out,” said Woodworth.
Along with lower rates, hotels in small markets – where competition is lighter – saw significant RevPAR increases, CBRE reports. In 2016, RevPAR growth for the 60 markets covered by CBRE’s Hotel Horizons forecast reports averaged 2.8 percent. This is below the aggregate 3.6 percent RevPAR growth achieved by hotels outside of the 60 markets. The gap in performance is expected to widen in 2017 when Horizons universe is forecast to see RevPAR increase by 2 percent. Concurrently, the remaining markets are projected to achieve a 3.8 percent increase in RevPAR during the year.
“So much attention is being paid to the major urban and gateway markets,” said John B. Corgel, professor of real estate at the Cornell University School of Hotel Administration and senior adviser to CBRE Hotels’ Americas Research. “Over three quarters of the new hotel rooms forecast by CBRE to enter the U.S. lodging industry in 2017 will be in the 60 major markets we track, even though these markets represent just 48 percent of the overall national hotel inventory. The increased competition in major markets certainly helps explain why these markets have recently lagged in RevPAR growth and are expected to continue to suffer in the near term.”
“When you read the hotel trade journals there is a growing sense of skepticism among industry analysts and attendees at the major industry conferences. I attribute this to the large sums of public company money that have been invested in upper-priced properties in major markets,” Corgel noted. “Economy and independent hotels, as well as the secondary markets, are left off the agenda, so they are they are not top-of-mind.”
“The fact is that U.S. hotels are achieving all-time record occupancy levels and near-record profit margins. A lot of money is being made from hotel operations these days. While the prospects for growth in revenues and profits are moderating, opportunities still exist. Investors just need to investigate some of the historically overlooked chain-scale and geographical segments to find better returns,” Woodworth said.