The hotel industry remains solid and and strong, although the number of transactions and overall growth in the sector has deceleratedSonia Greenlee is a senior vice president with JLL in San Francisco heading up the hospitality team in the Northwest Region. Her work has placed her in front of national accounts such as Host Hotels & Resorts and Hyatt Development Corporation on multiple capital improvement projects. As a 12-year veteran of the industry, she brings a perspective on the market as it continues to evolve and transition. Here some of her thoughts.
What has characterized the hospitality industry across the country over the last few years?
Steady improvement. Since the sharp downturn of 2008/2009, we’ve seen a hospitality industry going through solid recovery, and this has increased occupancy and average daily room rates and led to greater levels of investment in the sector. However, the last 2 years have seen things slowing down. A “typical” cycle of continued RevPar (Revenue per Available Room = Average Daily Rate (ADR) x Occupancy) growth runs between 4-6 years. The latest cycle is pushing 7-8 years and is overdue for a correction. However, with RevPar growth still positive around 3 percent, industry analysts are wondering how much longer it may maintain at this low growth rate before hitting bottom. Overall, there are plenty of private equity and public REIT investors with funds seeking to acquire quality assets, but the approach and analysis is very cautious as we clearly are in a mature market cycle.
There is a very mixed bag of theories and perceptions out there, depending on who you talk to. Overall the predictions are for a flat or low growth year.
How have those trends affected the market in the Bay Area?
The number of transactions in the Bay Area has dropped significantly since the peak in 2015, with three significant deals in the first quarter of 2017. At the same time, we’ve seen more new construction coming online with more planned over the next few years, especially in downtown San Francisco. We’ve also seen more operators renovating, refreshing and in some cases, repositioning their hotels to compete with newer assets.
2015 was a year of record transactions and sales in the industry in California. By some reports, 2016 saw that pace slow down? To what do you attribute that?
True. At more than $60B, 2015 was one of the largest transaction volume years in recent memory, and we are clearly at the peak of the current cycle. Primarily you are seeing the back end of an extended cycle. The increase in RevPar reached its peak in 2015, with 8 percent increase from 2013-2014, and 6.3 percent 20015-2016. Potential buyers are looking carefully at current valuations and assessing opportunities to increase the value of new assets. They are hesitant to avoid overpaying as the cycle matures and this is leading to fewer transactions.
How is 2017 shaping up?
With 3 percent RevPar trending, transactions will still be happening, but we expect to see a slower pace. Current industry projections are for about $29B in sales in 2017.
How do you see 2018 performing?
I think it’s hard to predict. There is a very mixed bag of theories and perceptions out there, depending on who you talk to. Overall the predictions are for a flat or low growth year. However, there is a lot of focus on the political and legislative climate. If some of the Trump administration’s initiatives to lower corporate taxes, provide tax incentives and stimulate the economy produce higher corporate profits, this will lead to higher corporate travel, which obviously feeds the hospitality industry. However, if we see ongoing focus on travel bans and political global fracturing, that could have a negative impact on global travel to the U.S., which has been a strong driver in recent years.
What are some of the biggest trends we can anticipate in the industry within the next five years?
- Mergers & Acquisitions – Consolidation of ownerships & operators.
- More Brands – The continued rollout of new brands targeting very specific populations and traveler profiles
- Brand and operator focus on technology
- Unique local immersion experiences in design & activities
Many new office and housing developments are taking cues from the hospitality industry for design ideas. Are you seeing those trends continuing and the market innovating based on what is happening in the hospitality industry?
There continues to be a focus on activation of communal spaces, creating more social and collaborative opportunities. At the same time, allowing individuals to customize their experience with how they want to use the space, so creating options and flexibility.
How is the hospitality industry affected by the green movement? Is it a niche play for some developers?
To a certain degree. Certainly more so with new build & adaptive re-use hotels versus existing building renovations. Some jurisdictions have requirements for green initiatives so owners don’t have a choice but to meet specific minimum requirements. Overall, there can be a competitive benefit to having LEED certified hotels, but most owners don’t see a significant enough rate increase for being more than LEED Certified or LEED Gold. The uptick in room rate doesn’t necessarily offset the costs vs. energy savings in many cases. JLL has a strong energy sustainability division and we do try and engage the dialog and analysis on all appropriate projects.
How do you envision the future of the green building movement in this sector?
Overall I see it staying about the same, until the implementation gets closer to a net zero difference in standard construction and renovation costs.
Hotels in large metros have transformed from low-rise to high-rise buildings with mixed-use and residential components as well – how has that been working so far?
This really depends on the market. It certainly is becoming more common in booming urban areas, and appears to be a continuing trend as developers create a mixed-use property that helps diversify and support itself by activating the neighborhood with residential, hotel and often retail components.
What are some of the advantages of boutiques as compared to traditional hotels?
Boutique hotels are not required to fit specific brand requirements, so they have the opportunity, flexibility and absolute freedom to create a one of a kind experience and truly realize the vision of the ownership without restrictions.
We realize that we could probably do an entire Q&A on the effect companies like Airbnb and Home Away have on the industry, but could you summarize how the industry is responding to threats from services like those, and how is it evolving to take into account these new competitors?
Overall, I think it is too early to see the full impact of these players, but the industry remains concerned and alert. You do see room rate impact on compression nights, for example when a convention is in town. Typically these are nights hotels could get top dollar. Now with more options out there perhaps they can’t push rate as much as they used to. Airbnb really promotes the [immersive] local stay experience, but can’t compete for those customers that want a high level of customer service on their trips. The increased emphasis and impact in both design & operations for all brands in trying to create an authentic local experience and sense of place, I believe has a direct link to the Airbnb factor.
What are some things about the industry that you see as hopeful and impressive?
The strong interest in creating unique, custom and local experiences in all hotel segments from larger brands to boutique hotels. There definitely is a wide variety of options for the type of traveler whether for business, leisure, adventure or resort. The options also cover a wide range of price points. It’s a great time to create an individualized, memorable travel experience.
What worries you about the industry today and where it’s heading?
The number of soft brands being rolled out on an almost continuous basis creates some real confusion for the consumer in trying to distinguish between them. The messaging of reaching their target customer and what makes them each unique can feel like white noise at times, as it frequently sounds the same.
Additionally, with a lot of focus on rolling out innovative technology for the customer to interface with, there is not always enough focus on getting the basics right. Investment in a hotel’s infrastructure and building systems is harder capital for owners to spend because it doesn’t have immediate impact on room rate increase. However, in terms of guest satisfaction, these questions have big impact on the perception of a guest stay: Can I adjust the temperature in my room satisfactorily? Does the hot water & water pressure work well? Can I turn on the TV & lights easily? High tech bells and whistles can’t make-up for a frustrating experience if the basics aren’t taken care of, in fact sometimes the technology tries to get too slick, and it makes it worse.