HospitalityResearch

Q U A R T E R L Y U P D A T E
Second Quarter 2012

Investment Surges Amid High Demand, Light Building

The national hotel sector heads into the peak summer travel season riding atop steady improvements in room demand and revenue, while ADR and RevPAR, are steadily closing in on previous peaks. Expectations of solid leisure travel and sustained business traveler volume in the coming months rests partly on recent gas price trends. Although wide disparities in regional prices persist, gas prices were nevertheless notably lower at the end of May than earlier this year. Less robust global demand, increased domestic fuel inventories and the postponed closure of a renery in Philadelphia promise to hold down gas prices in the months ahead, sustaining travel. Despite optimistic projections for occupancy, ADR and RevPAR in the next few months, some uncertainty complicates the lodging sectors fourth-quarter outlook. Slowing growth in China and a faltering European economy may crimp U.S. economic growth, leading to less travel and reduced room demand. A tight presidential race and the possibility of a new round of wrangling over the U.S. debt ceiling may also heighten worries and weigh on the travel plans of individuals and businesses. Revitalized asset performance amid limited additions to hotel stock continues to push investors to acquire properties. Investors generally remain focused on hotels in major markets, which typically benet from stronger local economies and a broader, more diverse array of demand drivers. In Texas, for example, considerable attention is devoted to Dallas or Houston, but the state also oers investors alternative choices. Oil and gas markets in areas such as the Permian Basin are receiving greater attention, and it is not uncommon for assets listed for sale in the states smaller markets to elicit multiple bids. Nationally, investors appetites for troubled properties also remains keen, but opportunities are dwindling as more lenders work out distressed situations. On the nancing front, funding from the Small Business Administration continues to support additional investment activity, especially for select- and limited-service properties selling for less than $10 million. Deals involving larger full-service assets, however, may be held in check in the coming months due to widening spreads in the CMBS market.

Quick Facts
2011 Occupancy Demand Growth Supply Growth Average Daily Rate Annual Change RevPAR Annual Change Revenue Growth 60.0% 5.0% 0.7% $101.64 3.7% $61.02 8.1% 8.9% 2012* 61.0% 2.0% 0.4% $106.02 4.3% $64.69 6.0% 6.4%

Recovery in the Employment Market to Continue. Employers added 823,000 jobs in the rst ve months of 2012, though job growth unexpectedly eased in the spring following a strong start to the year. Nevertheless, rising retail sales and corporate prots will help generate 2.2 million positions this year, a 1.7 percent gain. Nationwide, Hotels to Post Performance Improvements in 2012. A combination of steady room demand and limited construction will generate a 100-basis point rise in national occupancy in 2012 to 61 percent, the highest yearend level in ve years. Property operators will continue to push daily rates higher during the year, resulting in a 4.3 percent bump in the ADR, though value-conscious travelers will limit the increase. RevPAR will rise 6 percent this year on minimal additions to supply. Bulldozers and Construction Crews Mued. Hotel construction picked up at similar points in past cycles, but remains very subdued this time around. Rather than new rooms coming online, 17 states recorded a drop in available rooms over the rst four months of 2012.

* Forecast Sources: Marcus & Millichap Research Services, Smith Travel Research

Economy and Market Conditions

Total Employment
Year-Over-Year Change (millions)

6% 3% 0% -3% -6%

08

09

10

11

12*

*Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

Rising demand for goods and services have supported the expansion of payrolls for 20 consecutive months through May this year. While job creation in April and May came in less than expected, with only a net 146,000 positions added, several employment sectors have turned in notable performances recently. Employment at hotels, for example, has risen by more than 15,000 jobs so far this year as operators hire sta to handle additional guest volume. The lack of new hotel openings, however, has likely suppressed payroll growth in the sector. Elsewhere, employment in the natural resources and mining sector has expanded 7.9 percent, or by 61,000 workers, over the past year as oil and gas exploration has accelerated. The addition of workers continues to create acute needs for work force housing in areas where exploration is occurring. Meanwhile, job growth this year has lowered the national unemployment rate 30 basis points to 8.2 percent, a level that still remains high by recent standards. The relatively elevated unemployment rate continues to hold down labor costs for hotel operators as they add sta, but subdued wage and salary growth also encourage prospective travelers to comparison shop hotels when planning trips. Room Demand Continues to Strengthen as Developers Stand By Leisure and business travelers continue to ll rooms as hotel developers sit on the sidelines, elevating occupancy in a majority of markets and industry segments. Nationwide occupancy was 58.0 percent during the rst four months of 2012, as a 3.4 percent jump in room demand pushed up occupancy 170 basis points from one year ago. However, the 1.7 percent rise posted in April may signal the end of easy year-over-year comparisons to depressed or soft year-earlier periods. Room demand growth in 2010 and last year was extraordinary as measured by historical norms and the remainder of 2012 will see solid, but more typical, increases. Despite the longrunning surge in room nights, development has not appreciably picked up. Rooms available have risen a scant 0.3 percent year to date through April, including a 0.4 percent uptick during the month. Construction nancing remains more challenging to obtain than debt to acquire existing properties, and many lenders remain fearful of the immediate and potentially adverse eects of another economic slowdown on room demand. Even the planning pipeline remains thin, as approximately 300,000 rooms are either under construction or well along in planning, marking a 10 percent decrease from one year ago. However, some of the national brands with extensive pipelines of planned projects include Holiday Inn, with more than 17,000 rooms spread over its various price segments, and Hampton Inn, which has 7,000 rooms under consideration. Operators Making Higher ADRs Stick, Approaching Pre-Recession Peak Steady growth in room demand and occupancy are supporting higher daily rates. Year to date through April, the national ADR of $104.13 was 4.2 percent more than the level in the corresponding period last year. On a daily basis, Sundays and Mondays have posted the strongest gains, while the midweek Tuesday-throughThursday period has lagged slightly. The mild underperformance of this businessdominated stretch may reect the inuence of rates negotiated by large employers several months in advance and the greater tendency of small businesses to comparison shop. While the increase in the ADR from one year ago marks a notable and positive trend, the current level still falls 4.5 percent short of the high point attained before the recession. As the economy expands further and hotel operators continue to diligently raise rates, that previous high will likely be surpassed in 2013. RevPAR also continues along a positive trend, rising 7.5 percent in the year-to-date period to $60.41 as a 7.8 percent jump in room revenues easily exceeded the paltry rise in available rooms. On a statewide level, results vary widely depending on supply growth and drivers of room demand. Several states exceptional performance stand out this year, however, due to surging energy sectors.
Marcus & Millichap

Growth in Room Demand Leveling

16% 8% 0% -8% -16% 08 09 10 11 12*
* Through April 2012 Sources: Marcus & Millichap Research Services, Smith Travel Research

Room Demand Rooms Available

RevPAR Surging in Several States*

North Dakota Indiana Illinois Louisiana Hawaii Tennessee West Virginia Massachusetts Montana Oklahoma

7%

14%

21%

28%

*Through April 2012 Sources: Marcus & Millichap Research Services, Smith Travel Research

page 2

Hospitality Research Report

Industry Segment Prole: Interstate Locations

Hotels that serve room demand generated from interstate highway trac are enjoying a strong year heading into the summer travel season. Through the rst four months of 2012, interstate hotels have posted a 5.1 percent increase in room demand, tops among all property locations, and an 8.7 percent rise in RevPAR, which trails only urban hotels. Interstate hotels are usually stopping points along the route to travelers nal destinations during the summer. Accordingly, occupancy this summer will approach 65 percent, about 200 basis points more than last year, but still short of the 67.3 percent reading posted in 2007 prior to the last recession. A key dierence between the current climate and the period before the economic downturn is the weak housing market. Before the recession, many relocating households traveling to other states often lled rooms at interstate hotels en route to new homes. Challenges persist in selling homes in one locale to move for a job somewhere else, restraining household mobility and depriving interstate hotels of a source of room demand. Recently, however, oil and gas exploration in nonurbanized areas has helped to ll the gap in room demand. Properties in areas including the I-20 and I-10 corridors in West Texas and I-25 and I-80 in other western states typically serve as work force housing in instances where other housing options are limited. Summer Occupancy to Top 69 Percent This Year A generally improving national economy will raise peak summer occupancy 140 basis points this year to 69.3 percent on a 2.5 percent jump in room demand. Viewed another way, an additional 460,000 rooms will be occupied nightly this year than in 2009 in the midst of the most severe phase of the recession. Higher occupancy will confer greater pricing power to hotel operators, though consumers will comparison shop rates for the best deals, contributing to respectable, but not substantial, rate growth. Accordingly, the national ADR will increase 4.1 percent during the peak period to $106.76, which is 1 percent less than the high level reached in 2008. Although owners and developers typically seek to open new properties in peak demand periods, available rooms will increase only 0.3 percent this year. Downside risks to the summer forecast include an unanticipated spike in gas prices, while elevated airfares and fewer ights may discourage potential travelers. In addition, natural events such as wild res and hurricanes may also force changes in travel plans. Prices of Branded Properties Approaching Bottom Somewhat greater access to credit and a still-present, but dwindling, collection of distressed assets made available for sale are fueling the investment market. Among branded select-service, limited-service and economy properties, the number of transactions surged more than 80 percent over the past 12 months. The largest gains were in the select- and limited-service segments, where deal ow accelerated 91 percent and 84 percent, respectively. National economy brands have been lagging the recovery in operations, but nonetheless posted a 67 percent jump in velocity over the past year. Pricing, meanwhile, appeared to be reaching a bottom. Selectservice brands traded at a median price of $61,800 per key over the past 12 months, down 4 percent from the preceding period, but 30 percent less than the earlier peak. Franchised limited-service assets carried a median price of $29,100 per room, a level 8 percent lower than in the prior year, while the median price of economy properties rose 17 percent to $25,000 per room. Nevertheless, the limited-service median price is 40 percent lower than the level in 2008, while the economy-brand median price is 28 percent lower. Although the investment market is more liquid than one year ago and bidding has intensied, lenders remain selective and underwriting is conservative. Overall, cap rates for all hotels averaged in the high-7 percent range so far this year. However, cap rates on agged limited-service properties typically start at about 9 percent.
Interstate Highway Hotel Occupancy
Peak Summer Travel Full Year

70%

60% 50% 40% 30%

07

08

09

10

11

Sources: Marcus & Millichap Research Services, Smith Travel Research

Peak Summer Travel to Strengthen

10% 5% 0% -5% -10% 08 09 10 11 12*
* Forecast Sources: Marcus & Millichap Research Services, Smith Travel Research

Room Demand ADR

Sales Trends in Branded Hotels

Select Service Limited Service Economy

$100
Price per Room (thousands)

$75 $50 $25 $0

*Trailing 12 months Sources: Marcus & Millichap Research Services, CoStar Group Inc., RCA, Smith Travel Research

08

09

10

11

12*

Marcus & Millichap

Hospitality Research Report

page 3

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

David Luther National Director National Hospitality Group Tel: (713) 452-4200 dluther@marcusmillichap.com

The Small Business Administrations 7A and 504 programs continue to provide funding through banks and private lenders to small owner/operators for the acquisition of limited-service and economy hotels. Both the 7A and 504 programs permit qualied parties to borrow up to 90 percent of a propertys loan to value, subject to loan and liquidity thresholds. The 504 program also oers a renancing option, which is subject to congressional renewal at the end of September. Mezzanine debt and preferred equity sources have also emerged recently, and can provide funding to raise nancing from 75 percent to 85 percent LTV. Mezzanine debt lenders require returns varying from 9 percent to 13 percent, while preferred equity positions require IRRs starting in the high teens. Conduit lenders remain the primary option for borrowers seeking debt of more than $10 million. Loan terms start at seven years, with 20-year amortization schedules. LTVs typically vary from 50 percent to 60 percent, with interest rates generally varying from the high-4 to high-5 percent range. Strong locations and stabilized historical operations, brand aliations and qualied sponsorship are key considerations.

Hotel Property Index

In the hotel performance index, states and the District of Columbia are scored on year-to-date changes in room supply, room demand, ADR and RevPAR. A score of more than 100 indicates strengthening from the corresponding period one year before, while a score of less than 100 signals diminished performance. In the latest version of the index, only four states failed to score 100 points, a list anchored by Delaware, which incurred a loss in room demand. For the second successive quarter, North Dakota posted the top score, as the oil and gas boom in the western portion of the state is supporting a thriving hotel sector. Indiana claims the second position due to healthy gains in room demand, ADR and RevPAR. The Super Bowl in Indianapolis greatly inated results in January and February, while March and April were much more pedestrian. Large states such as New York, Texas, California and Florida fall further down the rankings but placed in the top half. Each of these states posted respectable improvements in performance measures, but were overshadowed by the performance of other states.
Index Value*
114.0 110.4 108.4 107.8 107.6 107.1 106.9 106.8 106.7 106.5 106.4 106.3 104.2

Market
North Dakota Indiana Illinois
Prepared and edited by

Occupancy Rate
70.7% 51.7% 55.2% 53.7% 60.2% 44.5% 78.4% 47.1% 45.5% 56.1% 64.0% 57.0% 58.0%

ADR
$95.76 $84.77 $98.64 $80.22 $80.80 $68.03 $204.49 $75.81 $85.88 $72.60 $109.40 $129.90 $104.13

RevPAR
$67.72 $43.81 $54.41 $43.10 $48.61 $30.30 $160.27 $35.68 $39.09 $40.75 $70.04 $74.00 $60.41

Art Gering
Senior Hospitality Analyst Research Services For information on additional research materials, contact

Tennessee West Virginia South Dakota Hawaii Montana Wyoming Oklahoma Louisiana Massachusetts U.S.

John Chang
Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com

Price: $75

Marcus & Millichap 2012 www.MarcusMillichap.com

* Year to date through April 2011 Sources: Marcus & Millichap Research Services, Smith Travel Research

The information contained in this report was obtained from sources deemed to be reliable. Every eort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services, CoStar Group, Inc., economy.com, Lodging Econometrics, PKF Consulting, Smith Travel Research.