Good Times for Hotels, But Properties Are Harder to Develop

Apartments have been the darling of the recovery since the recovery started, but the hotel market has snapped back from the dark days of 2009 and '10 almost as dramatically.

Apartments have been the darling of the recovery since the recovery started, but the hotel market has snapped back from the dark days of 2009 and ’10 almost as dramatically. Oddly enough, a small drop in average RevPAR reported last week by hospitality industry specialist STR Inc. demonstrates the current health of hospitality, at least for owners (for developers, it’s a different story; more about that shortly). For the week ending April 4, revenue per available room was down 0.7 percent to finish at $72.93. According to STR senior vice president Brad Garner, that was the first time in 49 weeks that industry-wide RevPAR was negative for a week. It’s all been up, every week, since this time last year. STR hasn’t ever tracked a streak of RevPAR growth longer than that.

Not only that, since the drop was probably because of the timing of Easter and Passover, Garner expects growth in that important metric to bounce back and enjoy another long upward streak. The company projects an annual RevPAR increase of 6.4 percent in 2015. Hotel occupancies are strong these days as well, STR adds. Last year median occupancies nationwide managed to surpass those of 2000 during some weeks, and all year were well above the median from 2000 to 2007. This year occupancies are on track to do the same, or even better.

What’s driving these persistent increases? Renewed demand since the end of the recession, naturally, but supply isn’t keeping up either, for a number of reasons. One factor is increasing construction costs, with increasing construction of residential and commercial properties putting upward pressure on all asset classes, including hospitality properties. Nationwide construction costs were 2.8 percent to 3 percent higher in 2014 than 2013, according to a recent report by hotel consultancy HVS, with labor and materials costs all up, except for energy costs.

It’s also true that in many markets, hotel developers are competing for land with residential developers. Because the ROI is often higher for apartment or condo projects than for hotels, residential developers can afford to drive up prices. There’s also a shortage of labor. Not just construction labor—though that’s certainly the case—but also other kinds of specialists that are part of the development process. Hotel developers have found that there aren’t always enough staff in city offices to review projects in a timely manner. The shortage can extend to the state level as well. One example cited by HVS: There used to be 30 fire marshals to approve projects in the state of Georgia, but not anymore. Now there are only 12 marshals to handle even more work.