ALIS Conference 2018
In January, we attended the ALIS Conference in Los Angeles. There was a lot of excellent information provided at the event but for this article we have pared down our notes to report on one presentation…
THE NUMBERS – What we are dealing with and where are we headed?
The economy is currently in, what the moderator of the event called, a Goldilocks Period (just right!), with global growth, GDP expansion, strong consumer confidence, and some of the lowest unemployment figures in 17 years.
Here is what the panel had to say:
Carter Wilson, VP Consulting & Analytics, STR
The Hotel Economy
The hotel economy is tied into the overall economy, which is firing on all cylinders. Two things to keep an eye on are:
- Expected interest rate hikes, which essentially serve to cool an overheating economy.
- The weakening dollar. Now that the US dollar is in decline we may experience an increase in inbound tourism.
Looking at the hotel economy specifically:
- New supply is not a concern (with the exception of certain markets). In general, new construction is starting to trend down, which is positive for the hotel economy.
- STR is bullish on demand growth.
- Average rate growth has been anemic but will continue to grow slowly. Anyone hoping to see 5% growth will be disappointed but we will probably see a little more pricing power this year because of a strong economy.
- 2018 predictions are that demand will outpace supply and we will have another year of record occupancy numbers. Rate growth will be a little less than 2.5 % and RevPAR will be just under 3%.
- In 2019, we will see more of the same. However, this will be the year that we start to see occupancy flatten.
- Natural disasters played a role in the strong demand numbers we have seen nationally. If you look at national RevPAR numbers and extract Florida and Texas, you can see they caused a 150 basis point lift in RevPAR growth. The need to rebuild in these areas will continue to boost demand.
Cindy Estis Green, CEO and Co-Founder, Kalibri Labs, LLC
Daily Rate and Guest Paid Revenue
What hoteliers report on their P&Ls doesn’t tell the whole story. Today, guests are paying a lot of money to 3rd parties. The real rates that guests are paying are not reflected in what is reported industry wide.
The good news is that guest paid revenue has grown at a pretty strong pace. Guest paid revenue is what is reported on the P&Ls in addition to the whole sale commission paid to 3rd parties. Kalibri Labs predicts that in 2018 guest paid revenue will be $161.6 billion.
This $161.6 billion includes $4 billion in wholesale commissions being paid to 3rd parties. When considering the $4 billion in commissions, the guest actually pays about $3 more than what is being reported on hotel P&Ls. In NYC, this average rate is about $8 higher than what is reported, and in San Diego it is about $5 higher. In general, the true average rate is not being reflected in the revenue that is reported. Not knowing the real average daily rate puts downward pressure on the rates.
Rates are rising, however the hotels aren’t collecting on the rate increase. Also, hoteliers are very focused on the RevPAR index, which can sometimes push them to go for occupancy at the expense of rate. The pressure created by 3rd parties can cause hoteliers to lower the rates on direct bookings to be more competitive.
Besides the $4 billion going to wholesale commissions, another $10 billion goes to retail commissions, transaction / channel costs and loyalty costs, and another $12 billion goes to sales and marketing costs. This leaves $135 billion in net revenue for hotels in 2018, an increase of about 3.8% from 2017. When net revenue doesn’t increase proportionally with guest paid revenue it means cost are getting higher. According to the figures, in 2018 hoteliers will keep about 83.5% of guest paid revenue.
If we look at 2017 vs 2018, the amount that hotels are not collecting is equal to about $420 million more than last year. If you apply an 8 Cap to this $420 million, this equates to an over $5 billion in reduction in asset value.
Brand.com vs. OTA
One of the big questions people have is… “Are OTAs growing faster than Brand.com?” The answer is NO. Brand.com is selling over 300,000 more nights per room than OTAs.
For hoteliers, the Brand.com is a quarter of the cost of OTAs. Loyalty programs are making a difference, and Book Direct campaigns have been successful. Brand.com is about 23% of the total business (including group) and OTAs are about 14%. If Brand.com can keep growing at the same pace, even if OTAs continue to grow, costs for hoteliers will be lower and asset value will be maintained.
Mark Wynne Smith, Global Chief Executive Officer, JLL-Hotels
Transactions & Finance
In 2018, the volume of hotel transactions will be roughly the same as last year at about $24 billion. The volume of hotel transactions is not growing, predominantly because of the financing market. This is also due to the difficultly of reinvesting. In todays market, if an investor sells an asset, it is highly unlikely they are going to get a higher return when they reinvest. As a result, clients are considering capital solutions, such as recapitalization and restructuring partnerships, rather than pure exits.
Who is buying? Mostly domestic investors. Foreign buyers want to invest but are struggling to compete against the strong domestic demand.
Debt funds are seeing a significant increase in capital. Their growth over the past 4 years has increased significantly from $3 billion to over $50 billion annually, an approximate 200% increase in liquidity.
Financing new development projects has become more difficult. LTV ratios have dropped from 65% to 55% and the experts aren’t expecting that to change anytime soon.
Why is there such a large demand for real estate? There is a huge increase in allocation across the institutional investor pool coming from insurance company pension funds. Most of these pension funds are around 100 to 150 basis points under invested in their allocations. So,the big question becomes where to place the money?
Mark Woodworth, Senior Managing Director, CBRE Hotels
In 2017, STR correctly predicted a RevPAR increase of 3.4 %. However, they were incorrect in how they arrived at this number. They expected RevPAR to increase because of rising rate. Contrary to this, demand has continued to be positive, yet pricing hasn’t moved much. 2017 was the first time we saw an actual decline in ADR that wasn’t during a time of recession.
Small is the new big. If you strip out the top 25 markets, you see far more positive industry fundamentals. This is largely because of the rate of supply growth in the larger cities.
Demand growth vs. rate growth. Transient demand has been strong. However, transient rate growth, being at or just below inflation, is lagging behind the demand growth. This is a real problem for hotels that rely on transient demand. Group demand is mostly flat, shifting between markets but not really growing. However, group rate has a little more pricing power. STR predicts some growth for group demand, which may be positively benefited by new tax law, specifically if corporations gain.
There has been a decline in international travel. The United States and Turkey are the only two countries that have experienced decline in international travel. While many people only focus on the political situation, international travel to the United States began to decline in 2015 when the dollar began to strengthen.
Thank you to all the presenters at this year’s ALIS Conference. It was a great event!