“We broke a bunch of records in the US hotel industry in the past 12 months,” says Jan Freitag, SVP at Smith Travel Research in Hendersonville, TN. “As of March, on an annualized basis, all six key performance indicators are at all time highs.”

“There are more rooms available than ever,” which he contends is good for the industry. “While operators may bemoan the fact that competition is heating up, developers everywhere are seeing the hotel industry as a great 'play,' with healthy performance metrics.”

Among the other indicators, Freitag adds, “We've sold more room nights than ever before, we raised more room revenue than ever and that led to the highest occupancy, room rate and RevPAR.”

More specifically, he reports, for the 12 months ending in March 2015, nationwide room supply increased by 0.9%, demand by 4.6%, occupancy reached 64.9%, ADR hit $116, RevPAR came in at $75 and room revenue soared by 9.5%.

“One previous positive RevPAR cycle lasted 121 months and the post-9/11 period was 56 months of positive RevPAR growth; we're at 61 months now,” Freitag notes. “So we expect at least another 12 to 24 months of healthy RevPAR growth.”

R. Mark Woodworth, senior managing director of PKF Hospitality Research in Atlanta, is particularly bullish on demand. “Demand will continue to grow at a faster pace than supply,” he says. “As a result, occupancies will continue to increase this year and next. Current conditions have led to a sellers market with pricing power firmly in the hands of hotel managers.” He expects these conditions to persist “comfortably” through 2016, and perhaps 2017.

In the short term too, hotel analysts have an upbeat forecast, along with a rosy lens on last year. “We anticipate pretty significant RevPAR growth in the economy midscale with a rise in leisure travel,” predicts LaBerge. “Summertime leisure travel via car is expected to be off the charts this year. The other big statistic of interest is international visitors. In 2014, approximately 75 million inbound US visitors—more than the combined populations of the United Kingdom and Belgium—spent $180 billion.”

At LW Hospitality Advisors, Evan Weiss has a similarly positive outlook on demand. “I'm astounded by the robustness of the market,” says Weiss, New York City-based executive managing director and principal. “Even though there's a strong pipeline, supply growth is expected to be sub 2% while room demand will be up by 5%. There aren't a lot of dark clouds on the horizon. It's a market where people are making hay while the sun is shining.”

Developers also see good times ahead after enjoying the already-healthy market. “We've witnessed demand growth every year since the recovery started in 2010,” says Mitul Patel, Atlanta-based COO of Peachtree Hotel Group. “We don't see anything prohibiting demand growth, unlike what happened in 2006 and 2007 when there was overbuilding, coupled with the rug being pulled out from the market in 2008.”

In addition to the general improved health of the economy, one analyst notes that the low price of oil is impacting the hotel market. “The direct impact of oil prices are going to fuel demand and operations for at least the next 12 months,” according to Gregory LaBerge, national director of Marcus & Millichap's national hospitality group

“The average price is about $52 a barrel,” he adds, “but every day it stays below $50, it pumps $400 million into the economy in discretionary income and $200 million in business savings. Actually, as long as it stays between $45 and $65, it'll be a major benefit to the economy and no one seems to believe it'll go north of $70 to $80 this year.”

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IN THE BLACK

Meanwhile, the profitability of hotels last year hit astounding highs. In its latest report, “Trends in the Hotel Industry,” PKF-HR, a CBRE company, reveals that US hotels (on a unit-level same-store sales basis) achieved a 12.3% increase in net operating income during 2014. This marks the fourth consecutive year of profit growth in excess of 10%, a trend PKF forecasts will continue through 2016. That makes the six-year period from 2011-2016 the longest streak of continuous double-digit gains on the bottom line for the nation's hotels since PKF began tracking the industry in 1937.

“In 2014, the average hotel in our 'Trends' sample achieved a bottom-line profit of $17,849 per available room,” Woodworth states. “This is nominally greater than their 2007 pre-recession peaks, but perhaps of greater importance is that hotel profits, in inflation-adjusted terms, will exceed 2007 levels in 2015.”

And in even better news, the property types that are benefiting from this increased profitability have expanded beyond select service—the hotel segment that has been the darling of the industry in recent years.

“The NOI of bigger, full-service hotels has started to increase, particularly in the past six to 12 months,” declares Mark Owens, managing director—hospitality group at the Ackman-Ziff Real Estate Group.

Agrees Geoff Davis, president and senior principal, HREC, “If you're talking about hotels in the top 25 MSAs, yes, you'll see increased performance.

“We recently traded a full-service hotel in a suburban location that went for below replacement costs,” he continues. “If you can buy full-service hotels in suburban markets for less than replacement costs, that allows you to compete with select service and you'll have meeting space—they don't offer that.”

In part, adds the New York City-based Owens, the uptick in NOI at full-service properties “is being influenced by a rebounding meeting and group segment. At the end of 2014 into early 2015, we saw a big pickup in the meeting and group segment in large hotels we're financing. That's really important for full-service hotels and it's a big component of the business at some airport hotels.”

He explains, “During the recession, meeting business had a short-term booking window but now it's extending, which is really good because if, for example, an owner has a 400-room hotel and knows in advance that 100 rooms are booked, it gives that owner the ability to play with room rates. People were hesitant to push rate this year because of the newness of the market's success but we'll see that this year.”

That pricing power is the linchpin of hotels' success, and properties that have it will go beyond select-service hotels, Owens asserts. “I expect to see strong rate growth in the full-service and luxury segments, largely because of the uptick in meeting business. It doesn't just sell rooms, it also creates food and beverage revenue, as well as ancillary revenue.”

Overall, asserts Freitag, “Room rates will be 5% higher this year and next.”

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MONEY GROWING ON TREES

All of this positivity is increasing the hotel sector's appeal to lenders. “There's a huge appetite for lending in the hotel space,” reveals Weiss.?“A lot of the equity providers—such as foreign entities like sovereign wealth funds—as well as pension funds, private equity, hedge funds and even REITs all are looking to put out money. We saw Blackstone recently raise $14 billion in record time. There's a lot of money chasing very little yield.”

Further, he adds, “Deals are getting done at 65% to 75% loan-to-cost, and underwriting is a lot more rigorous, even for the life insurance companies. They're looking at land values, insurable values, sales comparables, cap rate comps—there's a keen focus on the metrics.”

Weiss says, “There's a robust level of focus on sponsors, their relationship with the lender and the hotel's management team. Also, we're seeing personal guarantees and construction guarantees. Construction lending is available as well for the right sponsors.”

Like developers, lenders are favoring the select service segment, states Romy Bhojwani, COO at Excel Hotel Group, a hotel developer, owner and asset manager based in San Diego. “Institutional capital has started to move in a high velocity toward select service because it likes the fundamentals. It's not as volatile as full service because the type of demand is more resilient to a downturn while full-service properties are very dependent on group business.”

He adds, “We have a lot of Hilton Garden Inns, and similar properties—travel in that segment is fairly predictable. Plus, we don't have a cost structure as onerous as that of full service properties.”

Money is available at a good rate too, adds Geoff Davis. “The cost of capital is very low compared to historic levels. It's 5% to 7%, whereas a few years ago it was 9% to 10%. There's plenty of debt available for renovation, refinancing and new construction.”

Still, lenders aren't just writing blank checks, notes Jeffrey Davis, New York City-based managing director, investment sales & hotel investment banking at JLL. “There's plenty of liquidity in debt lending, though there are tight standards. Today, underwriting is more constrained relative to in place cash flow. Sponsor, location and branding all are important. Paper from the CMBS market may start taking a more conservative approach. But being conservative helps to keep things in check.”

He continues, “I'm not sure that we'll see the same forward looking underwriting as we did during the last peak but during the downturn, KKR, Apollo and Blackstone all established debt funds and—while those are a bit more expensive—they provide more alternative capital sources. Traditional bank lending is available too. There's liquidity across the market.”

PENDULUM SHIFT

Despite the white-hot climate of the hotel industry, “There are pockets of weakness, contends Jeffrey Davis. “Some markets have oversupply and absorption issues; New York City is probably in the red zone.”

He adds, “NYC has had its largest increase in supply in 25 to 30 years since 2011/2012—we're talking about thousands of rooms—and new inventory is still delivering. Occupancy is back to peak levels and the supply is select-service, making it hard for owners to push rates. That's undercutting full-service properties' ability on rate. New York has had a bad first quarter—we've seen negative 4.2% RevPAR year-over-year.”

As a result, Davis continues, “The city could see negative RevPAR for 2015. Some people say it'll be flat, some say it'll grow by 1%.”

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Adds Weiss, “In terms of year-over-year RevPAR growth, New York has been an underlier to the downside. The city has 12,000 rooms under construction in Manhattan with another 10,000 to 15,000 in some phase of development. Even the Bronx and Staten Island are adding a fair number of rooms to their historical level. It's about 500 to 1,000 in the Bronx; that's about a 40% increase.”

“Looking at all of that,” he continues, “the pricing power has been somewhat eroded in New York City. “But that's temporary; New York City is under-hoteled. There's enough demand, it will just take some years for all of the new supply to get absorbed.”

Weiss' numbers further make the point. “There was an 8% decline in RevPAR during the first quarter in New York City; I would expect -2%% to 2% RevPAR growth for the year.”

Other parts of the country may see slight declines too, according to industry observers. “You have to watch markets like Nashville, where new supply was added recently, and New Orleans,” notes Jeff Davis. “But the fundamentals are strong and we're seeing glimmers of light from group business.”

Notes Freitag, “Nashville had the highest room rate growth last year because we have the brand-new Music Center, a 1.2-million-square-foot meeting/convention center Downtown with an 800-room headquarters hotel next to it and the city is building a Westin and maybe a JW Marriott. Then you have a lot of new limited service hotels and a lot of announcements for boutique properties from Virgin Hotels, 21c Museum Hotels, Thompson Hotels and Starwood Hotels & Resorts,” the latter as part of its Tribute brand.

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Another issue sparking concern from several market watchers is the rise of the dollar. “The dollar could be a problem for all of the major markets, including Miami, New York City, Orlando and some West Coast cities, possibly even Las Vegas,” says Weiss. “It could impact middle class travelers from Europe and elsewhere.”

“The dollar is very strong against the euro and yen,” asserts Freitag, “and while individual tourists don't look at a room rate today and say, 'wow, it's 30% higher than a year ago,' all they have to do is read the newspaper. Once they read stories that say Europe is on sale and the US is expensive, Europeans will decide to stay home while Americans will realize Europe is cheaper than it was a year ago.

And, he continues, “People don't book their family vacations at the last minute, so even if the dollar gets weaker, people who said, 'Let's go to Greece' when the dollar was high aren't going to switch.”

Woodworth sounds a cautionary note on nationwide demand. “The rate of increase in demand will be lower than it has been in recent years. An increasing number of markets are selling out more frequently, thus they do not have the capacity to accommodate comparable levels of demand growth.”

But this swing toward higher occupancy and smaller rate increases shouldn't shock anyone in the market, he adds. “We are beginning to see one of the basic laws of economics play out: as price goes up, demand reacts negatively. This is to be expected at this point in the lodging cycle.”

Adds LaBerge, “We believe 2017 will have mixed results. At that at point, supply will outpace the long-term average—2.3% growth is our forecast—and that'll create some softening fundamentals in terms of ADR and other metrics.

“There will be higher interest rates,” he continues, “which will discourage investment in facilities, moderate the flow of capital and we'll have higher inflation so that'll weigh more on consumer wages, which will impact demand. I'm not forecasting a steep fall-off, it's just the year when I think the market turns a corner.”

Supply growth also is a factor in determining which direction the market heads in. “There's going to be a lot more select-service properties being built, and full-service is starting to ramp up again,” notes Rick Mansur, president, CEO and principal, Azul Hospitality Group, a San Diego-based hotel developer, owner and asset manager. “It's always a little concerning when a lot of supply is coming in but we're seeing properties go into urban areas where there already was demand.”

In other words, he contends, “People are being smarter than they were in past surges about where they're building.”