U S Hotel Industry Outlook 2014

U.S. Hotel Industry Outlook

2014 Presented by:

Underwritten by:

Hotel Business 速

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INDUSTRY OVERVIEW

U.S. Hotel Industry Outlook

2014

OVERVIEW Industry growth continues in ’14; room rates to surge..................3A

Industry growth continues in ’14; room rates to surge T

he overall U.S. hotel business is expected to post another brisk year of recovery

2014 Year-end Outlook (% change) 5.5%

and growth in 2014, with anticipated room rate hikes almost entirely driving forecasted RevPAR gains. While some experts predict

4.4%

slower demand growth and relatively modest new supply, the consensus seems to be that the nation’s existing room count still remains sig-

ECONOMY

nificantly underpriced.

Economy segment to grow in rate and RevPAR............................5A

RevPAR and ADR growth respective to the

MIDSCALE Midscale hotels hold down the middle in 2014........................ 7A

There’s a notable variance in the levels of various chain-scale segments and individual geographic hotel markets. But still, the rebounding economy is fueling increases across

1.0% Occupancy

“We’re going into a new year with momentum,” said Scott Berman, principal & industry leader for the Hospitality & Leisure practice

UPPER-MIDSCALE

everybody’s feeling generally good, but you re-

Upper-midscale hotels continue building, driving rates...............8A

raphy and chain scale to really see just who’s

National Forecast (% change) 6.6%

ally have to break the industry down by geogin the best shape. The starting place for me is

4.8%

PwC looking at 5.9% overall RevPAR growth

UPSCALE

for 2014.”

Upscale hotels stay strong amid new supply............................10A

is

Upper-upscale hotels to shine, despite slow group biz............ 11A

RevPAR

Source: Smith Travel Research

the board, just in different degrees.

at PricewaterhouseCoopers (PwC). “I think

UPPER-UPSCALE

ADR

Since modest demand and occupancy growth generally

predicted

overall—remaining

at averages above the 70% occupancy range for some segments—the projected RevPAR

1.8%

growth will therefore stem from higher ADRs. This is an extension of the fundamental pat-

Occupancy

tern also seen last year.

ADR

RevPAR

Source: PKF Hospitality Research

“When you look at it generally as a broad brush, what you’ll see in the numbers is all of the chain scales’ RevPAR growth will be

LUXURY Luxury segment set to lead in RevPAR growth for ’14...........12A

story across the board,” said Bobby Bowers, SVP at Smith Travel Research. “Right now, it’s almost a replay of 2013, from what we see. You never know what’s going to pop up that’s un-

INDEPENDENT Independent performance rivals top segments.........................13A

2.5%

driven primarily by rate, and I think that’s the

expected, but from the economic view things

1.2%

look good.”

According to PKF Hospitality Research, real ADR growth will remain so healthy, it will surge at roughly double that of inf lation, verging on continued on page 14A

Supply

Demand Source: PKF Hospitality Research

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Choice Hotels re-imagines Comfort brand family

S

ince introducing a property improvement incentive program and new design package

utilizing Comfort’s Truly Yours design package.

The Truly Yours design package was based on in-depth

to Comfort branded hotels, Choice Hotels

feedback. New York-based design firm Gensler conceived

International has been capitalizing on the cur-

the design theme for the Comfort family following an

rent upswing in lodging demand and pricing to position

extensive research process that included one-on-one

Comfort Inn and Comfort Suites as top upper midscale

interviews with potential developers and existing franchi-

hotel brands.

sees along with 1,500 online guest surveys.

With 2,434 hotels under the Comfort Inn and Comfort

Consumer research indicates guests are willing to pay

Suites brand flags worldwide, Choice Hotels International

more on average per night compared with the current

has stood by its initiative to support franchisees, who are

design. The new Comfort Inn and Comfort Suites design

updating their existing portfolios. In 2013, Choice Hotels

aims to meet the needs of its guests by maximizing space,

introduced a $40-million property improvement program

materials, human resources and decor.

(PIP) incentive to build on the success of the ongoing

“New-build hotels opening with the new prototype

system-wide refresh strategy of its nearly 1,900 domestic

will offer a terrific product and perform really well,” said

Comfort Inn and Comfort Suites hotels.

Pepper. “We are a competitor to brands such as Holiday

“We’re seeing an incredible take on the PIP incen-

Inn Express, Hampton Inn & Suites and Fairfield Inn &

tive,” said David Pepper, SVP of global development for

Suites, and this new prototype puts our brand at the fore-

Choice Hotels. “We feel that we are going to see a true

front of our competitive set.”

upgrade to the existing product.

We’re happy to see the enthusiasm behind the incentive and eventually see the impact on our existing portfolio.”

Qualifying domestic Comfort branded properties

The Comfort brand family’s new aesthetic offers a

could apply for the improvement program, which will be

luxurious look and feel typically not associated with mid-

awarded following the completion of the property im-

priced brands. The experience begins as guests arrive at

provements through a forgivable promissory note. Hotels

the hotel. Each hotel exterior features a signature entry

receiving incentive funds will not owe anything back to

with warm and inviting lighting. Upon entering the lobby,

Choice Hotels, as long as they remain in good standing

guests are treated to dark wood-style flooring and flexible

under the franchise agreement.

seating, featuring sofas and lounge chairs configured in

To ensure timely implementation, all incentive eligible

work, meeting and social gatherings. The new welcome

work must be completed on or before September 30,

wall behind the reception desk will cast a warm glow,

2014. The company will pay out incentive funds after PIPs

comprised of a reception desk and stone backdrop with

have been completed and verified through property in-

integrated lighting.

spections and submitted invoices.

“Franchisees have been very eager to adopt the experi-

“Owners are really excited,” said Pepper. “The timing

ence offered by the new prototype,” said Anne Smith,

is good as we’re coming off the downturn. Franchisees

VP, Brand Strategy for Comfort Inn and Comfort Suites.

are investing in their hotels and are now upgrading

“Guest satisfaction has been very positive. They are saying

their assets. With Choice Hotels International, franchi-

‘wow, this is more than what I expected.’”

sees can pursue upgrades with some assistance. It’s a win-win situation.”

“The company is 100% behind reimaging the Comfort

Inspired by a residential ambiance, the design continues in the guestrooms. These spaces include jewel-tone accent color and finishes as well as sectional sofas and

family,” said Pepper. “You will see a lot moving forward

lounge chairs with ottomans. To further make guests

from renovating existing hotels to new construction

feel at home, the newly designed rooms provide spa-like

across the country. You’re going to see a new Comfort

bathrooms with oversized showers, flat-panel TVs and

Inn and Comfort Suites. It’s going to be a real winner

custom-crafted artwork that reflect each brand’s logo.

and a strong competitor in the upper midscale competitive set. “ The new incentive program builds on the Comfort

Offering an inviting sleep experience, the new guestrooms feature upgraded bedding with colored custom bed scarves and choice of firm or soft pillows. Grand

brands’ Truly Yours brand positioning, which was formally

headboards integrate wall sconces, outlets for recharg-

launched through the Comfort Re-Imagined strategy in

ing mobile devices and individually controlled LED

2012. The strategy has been a key driver in guest satisfac-

reading lights.

tion. The incentive program is concentrated on high guest impact items such as carpet, furniture and mattresses

For more information, visit ChoiceHotelsFranchise.com or e-mail franchise_sales@choicehotels.com.

Top to bottom: The Comfort Suites in Fargo, ND exemplifies the Comfort brand family’s new aesthetic.

The redesigned lobby features dark wood-style flooring and flexible seating while the new welcome wall behind the reception desk casts a warm glow.

The guestroom offers a residential-like appearance with jewel-tone accent colors and finishes as well as sectional sofas and lounge chairs with ottomans.

ADV ERTORIAL

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ECONOMY REPORT

Economy segment to grow in rate and RevPAR P

ositive demand trends will drive economy

more supply in that price point, so the competi-

hotels to post significant occupancy gains in

tion is stiffer, and it’s more concentrated in the

2014, according to experts, enabling percentage

heartland of America, which is softer.”

growth in rate and RevPAR for budget properties

An important factor for the segment going for-

to remain on pace with or above national aver-

ward into 2014 and 2015 will be the recovery of

ages. That may not translate into a large dollar

overall national employment levels, which dictate

amount, but it’s still forward progress as the seg-

much of the demand for both economy and mid-

ment waits for national employment—a key de-

scale products. The upscale and higher segments,

mand driver—to fully recover from the recession.

on the other hand, are fueled by real personal in-

That’s why this year the segment is bucking the

come, which has grown post-recession at a much

industry-wide trend and benefitting more from

“Our forecast looks at a lot of economic vari-

prevailing supply trends in the sector are the pri-

ables. The two that we focus on are the real per-

mary cause.

sonal income and employment levels,” said Man-

“In the economy segment, net room supply is

delbaum. “One of the things we’ve found is that

expected to decline in the 0.5-1% range, while

the lower-end chain scales, i.e. upper-midscale,

demand is expected to increase 1.5%. This com-

midscale and economy, are more dependent upon

bination would yield 2014 occupancy growth of

employment variables, where luxury, upper-

2.3%, which is the highest occupancy growth

upscale and upscale are more dependent on the

forecast of any chain-scale group,” said Bobby

real personal income variable. If you look at the

Bowers, SVP at Smith Travel Research. “ADR

economy, while employment levels are starting to

is expected to grow in the 3-3.5% range. If the

grow, they’re not forecast to return to their pre-

current occupancy and ADR forecasts hold, this

recession levels until the latter part of 2014 or

would yield RevPAR growth of around 6%, third-

2015. The recovery of employment in the U.S. has

highest among all chain-scale groups.”

lagged compared to the recovery in real personal

predict, the demand curve is still well on the rise.

2.3%

Occupancy

ADR

RevPAR

Source: Smith Travel Research

National Forecast (% change) 7.3%

4.8%

recession levels.”

Still, the demand is there and operators are

tions to supply, up .3%, with demand growing at

confident, both now and looking ahead. Barring

2.7% outpacing supply, so it’s a pretty hefty oc-

any unexpected events or upheavals, operators

cupancy gain of 2.3%, and the ADR projection is

are projecting another steady, respectable year

equal to that of the national level, at 4.8%,” said

where smart owners will finish stronger than

Robert Mandelbaum, director of research infor-

where they began.

mation services for PKF Hospitality Research.

“Overall, we are looking at 2014 as being a good

“Percentage change in RevPAR for the economy

year; a continued trend, where we see increases in

segment is fairly strong—7.3%. But it’s important

occupancy, not very large, but somewhere in the

to note that the occupancy levels and ADRs are

two- to three-point range,” said Mike Monchino,

the lowest. Growth is looking strong, but the lev-

president of Monchino Management, which oper-

els of occupancy and ADR remain below the other

ates a number of branded and independent hotels in

chain scales.”

the Midwest, spanning both the economy and mid-

Others were similarly guarded with their out-

3.4%

income, which I believe is already back to pre-

“Our outlook for next year is some net new addi-

look for the segment. “Given the averages, the

5.8%

faster rate.

occupancy gains than from pushing ADR. The

Even in the case of positive new supply, as some

2014 Year-end Outlook (% change)

2.3%

Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

1.7%

scale segments. “Then we’re looking at average rate increases of somewhere from 4-6%.”

limited-service products are grinding through,

Monchino explained that in some cases, econ-

so we don’t expect to see overly robust results

omy properties are even benefitting from the

in those segments,” said Scott Berman, princi-

downturn, thanks to usually higher-tier guests

pal & industry leader for the Hospitality & Lei-

trading down to economy hotels based purely on

sure practice at PricewaterhouseCoopers (PwC).

price point. Monchino has personally witnessed

“Their base is smaller, in the sense that with a

regular customers walking away from some of

$50 rate, 3% is what, $1.50? You also have a lot

continued on page 14A

0.3% Supply

Demand Source: PKF Hospitality Research

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Choice Hotels International’s upscale brands gain traction in key markets

W

ith more than 6,300 hotels in over 30

“Ascend Hotel Collection continues to gain prominence

countries, Choice Hotels International is

as it grows internationally,” said Michael Murphy, SVP of

one of the largest players in the lodging

upscale brands for Choice Hotels. “The collection offers

industry, and has historically been a mar-

hoteliers the backing of one of the world’s largest hospital-

ket leader in the midscale and economy segments. But the

ity companies. Each property offers its own local flavor

recent expansion of Ascend Hotel Collection and Cambria

and an uncompromising commitment to service. With so

Suites in prime urban locations has strengthened the lodg-

many beautiful hotels in destination locations, Ascend’s

ing company’s foothold in the upscale market as well.

membership has quickly grown as a result of Choice Hotels

In the past year and a half, Choice Hotels International’s two upscale hotel brands have grown considerably with

International’s value proposition.”

Another Choice Hotels’ brand that is quickly gaining

new openings in key destinations and the addition of sev-

momentum in key markets is Cambria Suites. The upscale

eral new developments to the pipeline in strategic locations

brand has focused on developing new hotels in prime

targeting business and leisure travelers alike. Cambria Suites

urban locations with the goal of reaching the top 50 cities

has recently celebrated several groundbreakings in key mar-

in North America.

kets while the Ascend Hotel Collection has doubled its size

In the past year alone, Cambria Suites celebrated ground-

in just 18 months to 116 member properties now open with

breakings in Times Square, NY; Chelsea, NY; White Plains, NY;

25 more in the pipeline across

Washington, DC; Scottsdale, AZ;

eight countries.

Plano, TX; and Rockville, MD. And over the next 12 months, the brand

Ascend is a natural fit for boutique-style hotels, de-

has planned openings in Miami;

signed to give an authentic,

White Plains, NY; West Orange, NJ;

individualized travel experi-

Scottsdale, AZ; Washington, DC;

ence with a sense of local flavor

Orlando; and Scottsdale, AZ.

at each location. The portfolio

“The Cambria Suites brand has

of upscale, independent hotels

generated an impressive amount

appeals to a growing number of travelers who prefer to

of excitement for Choice Hotels International while experi-

immerse themselves in the destination and live like the

encing tremendous momentum,” said Murphy. “We have

locals when they travel.

developed relationships with first-rate development and

Ascend Hotel Collection’s network of member hotels embody one of three distinct categories: historic, boutique or unique—and show a commitment to service excellence.

operating partners in major markets. We anticipate the momentum will continue to grow in 2014.”

Cambria Suites offers contemporary, upscale accom-

This method ensures that all Ascend Collection members

modations that blends smart design, technology and style

offer a one-of-a-kind hotel experience defined by a strong

at an affordable price. Designed as a lifestyle hotel brand,

local identity, with upscale amenities and attentive service.

Cambria Suites features a spacious lobby to give guests a

“Ascend Hotel Collection has been a real winner for us,”

social atmosphere. The all-suite rooms include a separate

said David Pepper, SVP of global development for Choice

living, working and sleeping space. All Cambria Suites are

Hotels. “We have been able to grow the portfolio from 40

new-construction properties featuring a variety of public

hotels 18 months ago to nearly 120 today. The success of

spaces that include a state-of-the-art fitness center, relaxing

Ascend has generated tremendous interest and we think it

pool, 24-7 sundry shop and welcoming dining area.

will continue to grow at a fast pace. Member hotels benefit

“Our sophisticated guest experience and appealing bal-

from the revenue generation of our distribution platform

ance of amenities are designed to satisfy both the busi-

while at the same time realizing costs savings from being

ness and leisure traveler,” said Murphy. “We are excited

a part of a major international hotel company—all of this

to offer a stylish and sophisticated guest experience to

while maintaining their individual identity.”

visitors, as well as provide a relaxing and upscale place for

Within the past year, Ascend Hotel Collection achieved a number of milestones, both domestically and inter-

locals to meet.”

Cambria Suites, which currently has 18 properties open

nationally. In the U.S., Ascend opened its first hotels

across the country and 26 properties in various stages of

in key destinations, including The Equus in Waikiki, HI,

development, is showing strong signs for a breakout year

and the Downtown Grand Hotel & Casino in Las Vegas.

in 2014.

In addition, the Gibson Hotel in Dublin, Ireland and Lindenwarrah in Milawa, Australia were added to the already diverse international portfolio.

For more information, visit CambriaSuitesFranchise.com or AscendMembership.com, or e-mail franchise_sales@choicehotels.com.

Top to bottom: Cambria Suites broke ground last year on its latest property located in the heart of Times Square in New York City.

Targeting key destination markets, the Ascend Hotel Collection opened last year The Equus, the brand’s first hotel in Hawaii.

The Ascend Hotel Collection added the 252-room Gibson Hotel, located in the heart of Dublin, to its portfolio.

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MIDSCALE REPORT

Midscale hotels hold down the middle in 2014 I

ndustry experts predict that in 2014, hotels in

Like the economy segment, midscale hotel demand

the midscale segment will live up to the classifi-

is largely dependent on national employment levels—

cation’s name and perform dead in the middle of the

not real personal income, which drives the upscale

pack, with moderate gains in occupancy, rate and

and higher segments—and the overall domestic em-

RevPAR. And although slow and steady may char-

ployment levels simply haven’t recovered as quickly

acterize the segment’s recovery, sources say there’s

as real personal income. Things will improve though,

still upside ahead.

with continued gains in employment expected by late

Considering both the midscale and economy seg-

“Total real personal income in the U.S. fully recov-

recession than their upscale counterparts, it’s still

ered back in the second quarter of 2012,” said Mark

positive news that operators can push ahead in 2014.

Woodworth, president of PKF Hospitality Research.

“Midscale is right smack in the middle,” said

“According to Moody’s, their most recent forecast

Scott Berman, principal & industry leader for

actually has total employment returning to its pre-

the Hospitality & Leisure practice at Pricewater-

vious peak level by the end of the third quarter of

houseCoopers (PwC). “It is just under 5% RevPAR

2014, which would be almost exactly seven years

growth; 6.4% is the high in luxury and economy is

from peak to peak, whereas incomes recovered in

the lowest at 4.5%, so it’s somewhere in the middle

about half that time. It’s real personal income and

three quarters.”

corporate profits that move the demand needle for

That’s partially because demand is holding firm.

3.0%

0.9% Occupancy

ADR

RevPAR

Source: Smith Travel Research

higher-priced hotels, and it’s total employment that moves the needle for lower-priced properties.”

cupancy levels have remained strong enough for op-

There’s also tight competition within midscale’s

erators to start edging up rates this year, as the seg-

sub-segments, namely extended-stay product versus

ment works its way back toward pre-recession highs.

traditional, per-night hotels. For hotel properties

“Net room supply is expected to be flat or slightly

that rely on business transient in particular, com-

down, due to net conversions out and inventory re-

peting with the value of extended-stay—especially

movals,” said Bobby Bowers, SVP at Smith Travel

recently opened properties—will pose a nagging

Research, whose projections are slightly lower than

question for 2014.

Berman’s. “Flat supply combined with positive de-

“The general trend is workers that come Monday

mand growth means 2014 occupancy is expected to

through Friday who used to keep midscale at a good

increase about 1%. Combine that with anticipated

occupancy, are finding that they can book a room for

ADR growth of around 3%, and RevPAR is expected

seven days, instead of five days; so they don’t have to

to grow about 4%.”

check out, take their stuff home,” said Harry Mistra,

As Bowers mentioned, there aren’t many new-build

president of Karishma Riya Inc., which owns several

midscale rooms coming online. Mostly, the new in-

midscale properties. “They can check in Monday and

ventory is the result of brand-swapping.

leave Friday but leave their stuff there because the

“In the midscale segment, there’s a little more de-

4.0%

2014 and beyond.

ments have been more sluggish to rebound from the

With minimal new supply entering the market, oc-

2014 Year-end Outlook (% change)

National Forecast (% change) 5.1%

3.2% 1.8%

Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

rate is the same.”

velopment activity—it’s a positive change to supply.

So for owners, it often comes down to balancing

But not many people are projecting to build into

the scales of rate and occupancy perpetually down

this sector; a lot of hotels have changes of affilia-

the middle. With strong competitive, price-sensitive

tion that place them in this segment,” said Robert

pressure within the segment, it can be a tricky jug-

Mandelbaum, director of research information

gling act for revenue managers.

services for PKF Hospitality Research. “Demand is

“I try to do it on a midscale, for my properties. We

changing 3.1%, so there’s growth in occupancy, be-

try and get a good ADR—not sell it too cheap, so the

low-average growth in ADR and a 5.1% projection

occupancy is high and the ADR is very low. That’s

of RevPAR growth, which is our slowest-projected

not very beneficial to me,” said Mistra. “We look at

change in RevPAR among all segments. The mid-

mid-price according to the area, and our ADR is set

scale segment is the one that has continually lagged

there. We’re running at about 70% occupancy, and

in terms of percentage change of revenue and de-

we find it works out better, so that we get a good rate

mand throughout the recovery.”

that makes us money.”

3.1%

1.3%

Supply

Demand Source: PKF Hospitality Research

January 2014 • hotel

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UPPER-MIDSCALE REPORT

Upper-midscale hotels continue building, driving rates 2014 Year-end Outlook (% change) 3.7% 3.2%

L

ike its slightly higher-tier sibling the upscale

We’ve got a little bit of a lag in terms of ADR growth

segment, upper-midscale hotels will see another

[3.6%], and a relatively low projection for RevPAR

year of steady, moderate rate and RevPAR growth in

change [5.4%], but their projected occupancy level

2014, with demand still remaining high despite an

does eclipse their long-term average, so we suspect

active supply pipeline. And like much of the upscale

going forward that will enhance the ability of manag-

class, upper-midscale’s health reflects the success and

ers in this segment to raise their room rates.”

dominance of select-service products, which comprise much of the segment.

0.5% Occupancy

ADR

RevPAR

Source: Smith Travel Research

National Forecast (% change) 5.4%

3.6%

1.7%

Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

2.2%

Sources told Hotel Business that the industry is

service hotels. From an owner and investor’s stand-

evolving and placing greater emphasis on select-

point, it represents a lower risk and greater stability

service projects for new development, with tangible

over the long term.

numbers to show for it: In 2014, the upscale and up-

“It’s a simpler business model versus a full-service

per-midscale segments combined represent the larg-

or luxury property. You don’t have so many moving

est chunk of new construction coming online.

parts; you don’t have so many departments and places

“Upper-midscale is running neck-and-neck with

where you could lose money,” explained Cutshall. “If

upscale in the number of rooms under construction;

the economy turns down or the major demand gen-

however, upper-midscale 2014 percentage supply

erator leaves or something like what happened in

growth will be much smaller because the existing up-

Washington, DC with the slowdown in government

per-midscale base is much larger than upscale,” said

travel, maybe there will be less impact because you

Bobby Bowers, SVP at Smith Travel Research (STR).

don’t have so much complexity. Your business is pri-

“Again, it’s more of the same because most of the new

marily supported by transient demand—corporate

supply that is going to be coming from chains like

and leisure—and that’s a little bit easier to manage.”

Hampton Inn, Holiday Inn and those types of brands.”

Cutshall said an important factor also impacting

All the construction activity in the segment show-

the current state of upper-midscale is the perfor-

cases a shift in strategy for many hoteliers, even the

mance of another key product within the segment:

large investors. “You’re seeing capital groups—REITs

extended stay. According to Cutshall, extended-stay

and private equity that used to be primarily in full-

hotels—many of which fall into the upper-midscale

service—shifting to investing a lot in select-service,”

class—have been especially impacted by reductions

said Mary Beth Cutshall, VP of acquisitions & busi-

in government spending. The jury is still out on

ness development for Hospitality Ventures Manage-

whether that business will return as the economy

ment Group (HVMG).

continues its recovery.

But even new supply won’t deter operators from

“It definitely has impacted that segment. If you

pushing rate in 2014 and, thus, boosting RevPAR

break it down to who stays in extended-stay prop-

along with it. “Upper-midscale RevPAR growth is

erties, it’s very popular with government travelers,

currently forecast to be in the 3.5-4% range. This

for various reasons with a per diem, so they’ve had

is driven primarily by ADR growth of around 3%,”

an impact,” said Cutshall. “There’s also a lot more

said Bowers.

extended-stay business today than there was eight

Those numbers may not dazzle compared with the

to 10 years ago. There’s a different saturation of the

premium-priced segments, but experts say rock-

market, and as that recovers, I think that will help

solid occupancy projections for upper-midscale will

the extended-stay product. But it may be a little

greatly aid hotels working to drive ADR this year.

slower to recover, depending whether government

With the proper diligence, the RevPAR gains are

spending starts picking up again.”

there for the taking.

0.4% Supply

Demand

Source: PKF Hospitality Research

8A

Hoteliers are also attributing much of uppermidscale’s performance to the popularity of select-

Until that happens, upper-midscale hotels will lean

“Upper-midscale is the strongest performer among

heavily on transient demand, according to Cutshall.

the lower-tier categories, with 64.8% [projected 2014

“I think transient will still be leading: corporate

occupancy],” said Robert Mandelbaum, director of

transient and leisure transient,” she said. “Group will

research information services for PKF Hospital-

follow, and government after that. I think select-ser-

ity Research. “This is a relatively large segment, very

vice is in a good position to be able to benefit. Over-

popular among the developers as well as consumers.

all, it’s a good time.”

hotel business • January 2014

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UPSCALE REPORT

Upscale hotels stay strong amid new supply 2014 Year-end Outlook (% change)

6.6%

4.6%

1.9%

Occupancy

ADR

RevPAR

Source: Smith tavel Research

National Forecast (% change) 6.2%

6.6%

0.4% Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

I

n 2014, the upscale hotel segment—largely syn-

Sources said corporate transient demand is back at

service concept—will remain a vital, albeit middle-

peak levels, but group demand remains the big ques-

of-the-pack performer, according to experts. Even

tion mark. The very same changing dynamics that

in the face of reduced government demand and new

have somewhat stymied group demand flowing into

supply, this industry cornerstone continues to excel,

upper-upscale hotels has translated into higher up-

thanks in part to well-established brands and popu-

scale demand and a burgeoning supply pipeline for

lar, guest-centric products.

select-service properties, explaining why the sector

Experts say brands like Courtyard by Marriott and

leads in new rooms. This is the effect of many cor-

Hilton Garden Inn have done a sound job of ingrati-

porate groups—particularly governmental—trading

ating themselves with the traveling public; the proof

down to a lower-priced select-service product that’s

is in the results. Some predict upscale hotels will

perceived to still offer a strong value proposition.

lead the industry in 2014 new rooms supply, but that

“There’s still the ‘AIG effect’ that’s never really gone

will still barely put a dent in current demand for the

away and I don’t think it ever will,” said Chris Flagg,

segment, which also includes many extended-stay

SVP of business development for Crestline Hotels &

and boutique properties.

Resorts. “You’re seeing that change also impact the

“Upscale is probably the most popular segment,”

supply pipeline: You’re seeing more of that select-ser-

said Robert Mandelbaum, director of research infor-

vice upscale being built than I think you will see with

mation services for PKF Hospitality Research. “With

the full-service side. The industry has come to the re-

a strong increase in supply of 3.8% eclipsed with a

ality that corporate and government group will never

4.2% rise in demand, and therefore continued oc-

be back to previous levels, and the allocation of new

cupancy levels above 70%, we see a very strong 6.2%

supply between your big boxes and your select-service

forecast for ADR growth.”

boxes will adjust accordingly.”

Similarly, optimistic projections are in place at

When the new upscale supply does come online, ho-

Smith Travel Research, where analysts claim de-

teliers expect it will be more competitive than ever,

mand growth puts the segment near the top of U.S.

featuring the latest and greatest branded designs.

scales, even though it has more new supply than any

As much as that drives competition, it also feeds the

other segment.

overall health of the segment.

“It’s by far the leader in percentage room supply

“There’s really been some nice changes and program

growth, yet demand growth is expected to outpace

and design evolutions that will allow rate to continue

supply growth and full-year 2014 occupancy gain is

to increase in the segment,” said Paul Sacco, chief de-

currently forecast at nearly 2%,” said Bobby Bowers,

velopment officer at TPG Hospitality. “Whether that’s

SVP at STR. “RevPAR growth in the 6.5-7% range is

in suburban markets or traditionally urban markets,

expected, trailing only luxury chains.”

I think that niche will continue to grow in rate, occu-

Industry analysts told Hotel Business that much of the upscale segment’s performance hinges on rate—

4.2%

Supply

Demand

Source: PKF Hospitality Research

10A

pancy and supply, but supply that’s much more differentiated product than what you’ve seen in the past.”

like the rest of the industry at the moment—but this

When anticipating future performance other op-

sector is especially dependent on each hotel’s individ-

erators also stress the upscale segment’s broad-base

ual ability to drive price.

appeal to a wide spectrum of travelers. Undoubtedly,

“It’s more around pricing. An upscale buyer is more

3.8%

street by street conversation.”

onymous with the popular, ubiquitous select-

happy customers equal even happier hotel P&Ls.

price-sensitive and, therefore, is going to buy on rate,”

“The traveling public has really begun to under-

said Scott Berman, principal & industry leader for

stand the value of a select-service property,” said Mary

the Hospitality & Leisure practice at Pricewater-

Beth Cutshall, VP of acquisitions & business develop-

houseCoopers (PwC). “In upper-upscale we expect

ment for Hospitality Ventures Management Group

rate growth of 5.1%, upscale at 4.9%, so it’s margin of

(HVMG). “You have a lot of amenities that are com-

error. There’s a contrarian out there who says, ‘Why

plimentary, your parking, breakfast and Internet are

isn’t it higher? If your occupancies are so strong, why

free, and with the new prototypical designs, it’s a won-

haven’t you grown rate faster?’ That’s certainly what

derful experience. When a traveler is comparing cost

owners are saying. So it’s really a market by market,

and value, they can get a lot of bang for their buck.”

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UPPER-UPSCALE REPORT

Upper-upscale hotels to shine, despite slow group biz R

anked just behind the industry-leading luxury

upper-upscale properties greatly depend on the room

segment, upper-upscale hotels are anticipated

nights and revenues generated by these sources.

to post attractive gains in 2014, even though the

“Many of them have typically 20% to 50% of their

group business that once fueled the sector has been

room nights generated by group business,” explained

slow to return since the recession. But with occupan-

Mary Beth Cutshall, VP of acquisitions & business

cies steady and room for higher rates still plentiful,

development for Hospitality Ventures Management

hoteliers are hardly complaining.

Group (HVMG). “I think that’s going to continue

Representing the classic full-service “box” found in

strengthening and we’ll start to see rates go up a

most major urban and suburban markets, upper-up-

little bit. We’re feeling good about that—typically

scale hotels are doing a brisk business thanks in part

about a 5-7% RevPAR growth, depending on the

to big-name brands and overall healthy industry

specific market.”

demand, which consistently brings a flood of guests

Others stress the difficulty in courting and secur-

through the doors. Like all segments, right now the

ing group demand these days, with the competition

rooms are underpriced given the demand.

only getting tighter as group business remains con-

“This is your Marriott, Hilton, Hyatt segment,” said Robert Mandelbaum, director of research infor-

stricted. According to sources, it’s having a clear im“They’re still trending below their peak levels be-

some degree, it reflects the group demand segment—

cause group business is not back,” explained Chris

the demand increases may not look spectacular, at

Flagg, SVP of business development for Crestline

2.4%—but they’re running at 72.2% occupancy lev-

Hotels & Resorts. “We do feel there is group out

els, so you’re talking about a lot of capacity nights

there, but it really takes a sophisticated operator to

and inability to accommodate that many more room

find that group and capture that group, then create

nights. We forecast above average growth in ADR, at

some decent profit flow-through once that business

5.7%, resulting in a strong 6.4% RevPAR forecast.”

is booked.”

That falls in line with roughly 6% RevPAR growth

The other crucial question is the spending gener-

projected by PricewaterhouseCoopers (PwC), ac-

ated by those group guests once they arrive. Occu-

cording to Scott Berman, principal & industry lead-

pancy forecasts for 2014 may show plenty of rooms

er for the Hospitality & Leisure practice. Sources at

booked, but experts note your average convention

Smith Travel Research (STR), however, were some-

attendee isn’t racking up the same kind of bill they

what more conservative with estimates.

once used to, and company-paid “freebies” are cer“We are back at 2007 and 2008 levels in terms of

by ADR growth,” said Bobby Bowers, SVP at STR.

demand. Where we have a ways to go, is on group

“Growth in demand, or room nights sold, is currently

spending,” said Berman. “They’re not spending on

forecast at 1.8%.”

hotel food and beverage and hotel amenities, like

Supply trends also remain favorable, although the

they were. So, it’s a French-service dinner in the

pipeline is beginning to show signs of life again. STR

past, versus a buffet now; spa treatments are on your

is currently predicting 1.8% supply growth overall in

own dime, not the company’s.” mism. Considering upper-upscale’s solid demand

ply; there’s a pretty good bit that’s in there now,” said

base and higher rate potential, operators can focus

Bowers. “But in terms of the new supply that’s go-

on driving ADR while waiting for group travel to

ing to be coming online in 2014, I just don’t think

fully recover. To some it’s a matter of time.

that’s going to hit upper upscale at the top end.”

Occupancy

ADR

RevPAR

Source: Smith Travel Research

National Forecast (% change) 6.4% 5.7%

0.7% Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

2.4%

But that doesn’t mean there isn’t cause for opti-

“There’s a growing amount of upper-upscale sup-

that that’s going to be any kind of significant number

4.4%

tainly on the wane.

be around 4% to 4.5%, and driven almost totally

2014 for the upper upscale hotel segment.

4.3%

0.0%

pact on the numbers.

mation services for PKF Hospitality Research. “To

“Full-year 2014 RevPAR [growth is] expected to

2014 Year-end Outlook (% change)

1.7%

“We’re in a robust, growing economy. Companies still need to host meetings,” said Paul Sacco, chief

The main concern facing the segment, according to

development officer at TPG Hospitality. “That will

analysts and hoteliers, are the dynamics of the group

continue to happen, and there will still be a need for

business—especially large conventions and events—

group-oriented hotels. That will continue to evolve

which have changed since the recession. Typically,

as the economy evolves.”

Supply

Demand Source: PKF Hospitality Research

January 2014 • hotel

10a_11_HBIndustry_Outlook_14.indd 11

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LUXURY REPORT

Luxury segment set to lead in RevPAR Growth for ’14 2014 Year-end Outlook (% change) 7.0%

5.4%

N

ot just representative of the finest accom-

For hoteliers, it’s more of the same. Since de-

ment also continues to lead the pack in terms of

mand hasn’t been a concern, operators have been

projected market performance, with the overall

working to push rates for some time, and 2014 will

sector expected to once again post robust gains

simply be an extension of that objective. Mostly,

in RevPAR and ADR in 2014. With demand for

the job has gotten easier.

luxe rooms strong and steady as the U.S. economy

“We are seeing interest pickup in luxury. We’re

continues to improve, it’s become apparent that

finding that people psychologically are feel-

guests are ready and willing to splurge a bit when

ing confident to be able to travel and spend that

it comes to lodging.

money and stay at a property that offers a higher

At the moment, luxury hotels are benefitting

level of services,” said Mary Beth Cutshall, VP of

from a “perfect storm” of positive factors, particu-

acquisitions & business development for Hospital-

larly its favorable supply and demand conditions,

ity Ventures Management Group (HVMG). “We’re

as well as outside macroeconomic drivers.

actually able to move the rate, and I think if you

“It’s a function of the stronger economy, limited supply growth and all three major segments—

1.6%

Occupancy

ADR

RevPAR

Source: Smith Travel Research

7.3%

0.6% Occupancy

ADR

RevPAR

Source: PKF Hospitality Research

12A

fairly well.”

One sub-segment within the luxury sector that

particularly in room rate,” said Scott Berman,

is especially primed for growth is the resort mar-

principal & industry leader for the Hospital-

ket, according to Berman, who is based in Miami.

ity & Leisure practice at PricewaterhouseCoo-

In addition to capitalizing on greater domestic

pers (PwC). “The luxury segment is north of 6%

consumer confidence and discretionary spending,

RevPAR growth, and that’s all a function of antici-

luxury U.S. resorts also greatly benefit from an

pated rate growth for the industry: We’re expect-

ever-expanding base of foreign guests.

the luxury segment we’re expecting 6% growth.”

7.9%

look at the stats from 2013, that segment has done

group, leisure and commercial—showing growth,

ing 4.6% rate growth [overall] in ’14; and again, in

National Forecast – Luxury Hotels (% change)

going to be in 2015 and after that.”

modations available, the luxury hotel seg-

“It’s the convergence of the world; it’s not just America,” said Berman. “European travel habits

Other experts are even more optimistic, like

have been very beneficial to North American hotel

sources at PKF Hospitality Research, who also

performance, whether it’s the Caribbean, Mexico,

rank the luxury sector as the top performer for

Canada or the mainland. You can’t walk Times

2014. Sources there told Hotel Business that the

Square and South Beach and not hear multiple

remarkable occupancy levels at these hotels make

dialects. The same can be said for the West Coast

the anticipated rate push a given.

in terms of the inf luence of Pan-Asia.”

“We forecast occupancy at 74.8%, which is well

There’s also an evolution happening within the

above luxury’s long-term run average, by nearly

resort product, notably with all-inclusive offerings

five points,” said Robert Mandelbaum, director

gaining ground. Berman pointed to Hyatt Hotels’

of research information services for PKF Hospi-

recent deal with Playa Hotels & Resorts—which

tality Research. “Luxury has the strongest ADR

includes 13 all-inclusive resorts and 5,800 rooms

projection in the industry, at 7.3%, and the second

in the Dominican Republic, Mexico and Jamai-

consecutive year of RevPAR growth forecast above

ca—as a sign of things to come.

7%, with 7.9% RevPAR growth forecast for 2014.”

“I think you’ll hear the word ‘inclusive’ much

The demand fueling this surge will also remain

more,” said Berman. “It’s been around a long time,

stable, at least for now. Although there are projects

and hasn’t always been successful, but has been

in the pipeline for the coming years, in 2014, new

more successful in geographies with more favor-

luxury supply will rise, but still remain relatively low.

able wage rates, like Mexico, Cuba and the Domin-

“We’re seeing increased supply growth expected

ican Republic. Brands are testing these kinds of

in 2014—about 1%—up from 2013, which should

new concepts in the laboratory; if that model can

end the year basically f lat,” said Bobby Bowers,

be tested in areas where it historically hasn’t, to

SVP at STR. “There’s actually a fair amount of

a favorable result, I think we’re going to see more

luxury supply in the pipeline right now, but it’s

and more of that. Hyatt’s Playa announcement

not going to be coming online in 2014; it’s mostly

sort of sets the tone.”

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INDEPENDENT REPORT

Independent performance rivals top segments I

ndependent, non-branded hotels are expected to

market niche, such as university students. With over-

post strong performance numbers in 2014, spot-

all group business on the rise, the resulting increased

lighting both the overall robust demand trends in the

activity from key customers is oftentimes driving the

top U.S. markets and owners’ increasing ability to

considerable performance expectations levied upon

operate outside the traditional branded hotel model.

the independent segment for 2014.

Although much in the indie segment hinges upon lo-

“We are seeing university groups coming back.

cation, positioning and management, 2014 will be a

They’re performing very well, compared to previous

lucrative year for the sector if hoteliers have those ele-

years,” said Chris Flagg, SVP of business development

ments aligned.

for Crestline Hotels & Resorts, which operates several

According to sources, in 2014, independent ho-

independent hotels near universities. “We’re seeing

tels are expected to post the third-highest gain in

that growth continue to grow into 2014 as more and

RevPAR in the industry, just behind the luxury and

more of the university educational groups continue

upper-upscale segments. Although that may still

booking and increase the frequency of those bookings

surprise some, industry experts say the segment’s

in the coming years.

vitality can’t be denied.

2014 Year-end Outlook (% change) 5.1% 4.6%

“I think we are seeing the same type of rate increas-

“It’ll be quite an interesting conversation this year

es [as other demand segments] as well,” continued

around what is the value of a brand, when you see in-

Flagg. “It really is market-driven for how much of a

dependent performance much stronger than what I

rate increase we’re seeing, but for the university mar-

think conventional wisdom expected. [Independents

kets we’re in, I think we’re seeing some pretty healthy

are] actually quite strong; they’re up there with luxu-

ADR growth.”

ry and upper upscale,” said Scott Berman, principal &

That said, it still takes a smart operator to make an

industry leader for PwC’s Hospitality & Leisure prac-

independent hotel succeed in a largely branded world.

tice. “Independents will grow RevPAR at 5.8%, and

Without the benefit of a brand’s built-in marketing

4.5% of the growth will be room rate.”

muscle, hoteliers have to work harder and more cre-

Other analysts are equally optimistic, including

atively to ensure a steady stream of room nights, es-

sources at Smith Travel Research. “STR’s current full-

pecially if the property is looking to siphon business

year 2014 RevPAR forecast for independents is 5.1%

away from its local branded competitors.

[growth],” said Bobby Bowers, SVP at STR. “Like

“It really takes a sophisticated operator who knows

chain affiliated hotels, the RevPAR gain is expected

how to drive that independent business, how to get

to be driven primarily by ADR growth of 4.6%.”

that independent hotel appropriately marketed on the

Demand fundamentals remain strong in the sec-

Internet for booking both transient as well as group,”

tor, with occupancies holding steady. Limited new

said Flagg, “and then build a real proactive marketing

supply also bodes well for ongoing and future room

strategy, in order to capture the business that other-

nights sold. “Occupancy growth is forecast at 0.4%

wise may not be looking for an independent hotel to

[growth],” said Bowers. “Room supply growth is fore-

accommodate their events.”

cast to be under 1%, while demand will grow at 1.2%.”

One increasingly effective option is to take advan-

According to Berman, the projections reflect not just

tage of affiliation programs and other similar mass-

the underlying demand conditions of the industry,

distribution methods tailored to independents. These

which continue to rebound, but also the unique quali-

can offer a best-case scenario where the hotel can tap

ties of the independent sector, which is often focused

into the GDS and be marketed as part of a group on-

within thriving downtown and/or urban markets.

line, yet still retain its unique, non-branded identity.

“Independents are gaining quite a bit of traction.

“There are instances in which these affiliation op-

That’s a function of demand strength; that’s a func-

tions can be very beneficial,” said Paul Sacco, chief

tion of occupancy,” Berman explained. “There are a

development officer at TPG Hospitality. “Typically,

lot of sold-out room nights in places like New York

a lot of the [affiliation] brands have come out with

and Miami.”

solutions so that hotels with individual identities

Positioning plays a huge role in performance among

can still benefit from the system. If it has the right

independents, too. Many non-branded hotels were

location, and it’s the right product, then I think you

developed for and cater to a specific audience or

can achieve that.”

0.4% Occupancy

ADR

RevPAR

Source: Smith Travel Research

5.8%

4.5%

ADR

RevPAR Source: PKF Hospitality Research

January 2014 • hotel

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HOTEL INDUSTRY OUTLOOK

Overview

tinues to lag throughout the industry, and will be-

Economy

continued from page 3A

fuddle hoteliers yet again in 2014: group business.

continued from page 5A

new record levels. “We’re forecasting for 2014 ADR

Between cuts in corporate planning and reduced

his midscale hotels—for economy rooms—

to go up 3.9%, and inf lation’s going to be more like

government spending, this demand segment remains

when he wouldn’t lower rates. His own

1.5%, so you’re looking at roughly 2.5% real ADR

to slowest to recover.

economy-priced properties get a boost

There is, however, one demand segment that con-

growth,” said Mark Woodworth, president of PKF

“Group demand is a big question mark still, even

from the same ripple effect.

Hospitality Research. “Most people think inf lation

for 2014,” said Flagg. “I don’t think we will see

“In the economy segment, we have the

next year will be between 1.5% and 2%, so if our

a return of the group business that we once saw

opportunity to gain people from the up-

forecast is right, we’re looking at real rate growth

before [the recession]. It’s anyone’s guess really as to

per segments that drop down a segment

of roughly 3%. In real terms, rates are increasing at

why that group hasn’t come back to what it was in

or two,” Monchino said. “People try and

historic highs.”

2006 to 2007.”

say it doesn’t happen, but it does. I’ve

Analysts and hoteliers are also seeing quite a bit

Other insiders say hope still remains for group de-

seen it happen for years now.”

of dependence on location, too, with urban and

mand, which will inevitably benefit overall indus-

coastal markets slated for the highest gains, espe-

try pricing dynamics should it rebound. “We’re now

cially among the industry-leading luxury and upper

starting to see it from our own data, talking to our

upscale tiers. One core reason for the dominance of

clients and reading the third-quarter earnings re-

Others fear that beyond just trading

these markets is the rising surge of inbound tourism

ports from companies like Marriott, Starwood and

down, the discounting may go too far

from abroad.

Hilton. They are seeing group accelerating—book-

from there. “The luxury, upper-upscale

Discount pricing

“You’re seeing the coastal gateway markets—San

ings are up for 2014,” said Woodworth. “The absence

and upscale chain scales are all running

Francisco, New York, Los Angeles, San Diego, Phila-

of meaningful volumes of advance group meeting

north of 70% occupancy, while upper-

delphia, Boston—all up strong and at or very close to

business on the books has caused a drag on increas-

midscale, midscale and economy on av-

their peak levels. But your Midwest markets—Detroit,

ing room rates. If I have more product on the shelf

erage are running 11 to 12 points lower

Cleveland, Cincinnati and some of the Texas mar-

that I haven’t sold yet, I’m going to be much more

occupancy than the upper-priced cat-

kets—they’re going to see less growth in the future

judicious about how I increase the prices on that in-

egories,” said Mark Woodworth, presi-

years,” said Chris Flagg, SVP of business development

ventory, as long as I have a lot of it sitting there.”

dent of PKF Hospitality Research. “That

for Crestline Hotels & Resorts. “Some of the impact is

Overall industry demand has otherwise been col-

big gap there clearly means for one, the

from the international tourists, who are growing in

lectively strong, thus new supply is beginning to

lower-priced properties at low occupan-

numbers, especially the tourists from Asia.”

creep back as well, although nowhere near pre-re-

cies have a lot of unsold inventory that

cession levels. According to developers, much of the

they’re willing to really negotiate price

new-build product is centered on full-service and

on. That presents a bit of a drag on the

upscale to upper midscale select-service, located in

upper-price segments and therefore the

key urban and secondary markets.

industry as a whole.”

Urban markets According to other observers, urban markets are tops at the moment. Occupancies at urban hotels

“We’re bullish on major markets like Boston, Los

However from an operator’s perspec-

have not only returned to pre-recession levels, but are

Angeles, New York, Miami, San Diego and New Or-

tive, the lure of bargain pricing can be an

now exceeding those numbers and setting new highs.

leans for new opportunities,” said Paul Sacco, chief

added jolt to a demand picture that Mon-

“Hotels in the urban environment now on average

development officer at TPG Hospitality. “We also see

chino said remains ever-reliable. Consis-

are running at a higher occupancy today than they

opportunity for new-build hotels in secondary mar-

tent with analyst predictions, he said the

ever have,” said Woodworth.

kets near the hubs, like just outside Boston, or San

economy scale’s consistent base, plus the

Jose or Bellevue, where we think there’s upscale fo-

flat to declining new supply, means more

cused service potential.”

of the same in 2014, if not better.

Since demand for the core urban markets remains perpetually high, sources at PKF said the discounted pricing of recent years has only made room nights in

For most, 2014 will be a year guided by renewed con-

“The economy sector is one of the best

these locations surge. “If you look at the markets that

fidence. Among the hotels currently open for business,

survivor segments, in the sense that it

are recovering—the urban gateway markets, benefit-

most operators are preaching one all-encompassing

always seems to be the least affected by

ting from international inbound travel—I think the

mantra for 2014: Don’t be afraid to raise room rates.

what’s taking place in the marketplace,”

luxury hotels in urban markets in the early stages of

“As an industry as a whole, it is time to recognize

said Monchino. “Regardless of how bad

the recovery represented a good bargain,” said Rob-

that the economy is getting better,” said Mary Beth

or good the overall economy is, you al-

ert Mandelbaum, director of research information

Cutshall, VP of acquisitions & business develop-

ways have people traveling, even if it’s

services for PKF Hospitality Research. “If you were

ment for Hospitality Ventures Management Group

the worst of times, whether it’s for busi-

a meeting planner, it was an opportunity to get into

(HVMG). “We’ve come out of it, and it’s time to be

ness or pleasure. I find the economy seg-

New York, Chicago and San Francisco, where you

confident about that. We need to be smart and stra-

ment is more recession-proof than any

might not have in the past.”

tegic, but confident.”

other segment out there.”

14A

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