Within the commercial real estate industry, the lodging sector is among the most intriguing and, often, the most unpredictable. To understand where this sector is today, we called on one of the leading experts of the subject: Jim Butler, a partner in the Los Angeles law firm Jeffer Mangels Butler & Mitchell LLP (JMBM) and chairman of its Global Hospitality Group, as well as the author of the influential HotelLawBlog.com.
Q: How would you categorize the current state of the U.S. lodging industry? And which markets are currently seeing the most activity in terms of new construction and new hotels opening?
Jim Butler: We will look back on these times as the “salad days” of the current cycle. As reflected in the theme for our upcoming annual Meet the Money® conference on May 5-7 (see www.MeetTheMoney.com), we believe 2014 will be a breakout year for hotel development and deals. Industry profits and property values continue to grow at healthy rates that look to be sustainable for several years to come. Most experts think there are at least two to three good years left before this cycle peaks, and some think there could be five years.
Pent up demand and increasing availability of capital is driving both acquisitions and new development, particularly in the strongest markets such as New York, San Francisco, Miami and Hawaii. And the “renaissance” of downtown Los Angeles is propelling activity there to new highs as it becomes one of everybody’s favorite cities in which to buy or build a hotel.
Q: The latest survey compiled by Horwath Hotel, Tourism and Leisure found that hotel operators around the world were more optimistic about the near-future than they were in 2012 or 2013. What do you see as the issues that are driving that optimism?
Jim Butler: Steady continued improvement in industry fundamentals with solid occupancy levels (slower growth, but still growth), and stronger ADR particularly in upscale and luxury markets – with RevPAR growth running above 5% nationally and pockets in double digit. Growth in ADR and RevPAR brings proportionately more profit to the bottom line growth of NOI.
Q: Prior to the 2008 meltdown, condo-hotels seemed like the next big thing. But after 2008, they seemed to go into hibernation. Where is this niche market today?
Jim Butler: Condo hotels are back! Or perhaps it is better to say that the good ones never left us. Clearly there was a bubble of impractical exuberance when old Holiday Inns were being converted to condo hotels and sold at ridiculous prices to flippers. But the concept is sound if well designed and executed. The current projects we are working on seem well conceived and destined for success. The devil is in the details.
Q: If the economy continues to stay fragile or stalls out, how will that impact the lodging industry for the next year or so?
Jim Butler: One of the most remarkable aspects of the post-recession recovery is how the hotel industry improvement has out-performed the wobbly and fragile recovery of the economy. Perhaps this is because the industry suffered far worse than the economy in general with a nearly 40% drop in NOI as the recession bit hard. In any event, the close correlation of the hospitality industry performance to the GDP has been broken for quite some time.
If the economic recovery were suddenly to become more robust, that would almost certainly fuel even greater dynamics in the hospitality industry, but subject to the unexpected occurrence of some significant “event” or economic collapse, we seem well positioned to continue our sustainable and steady improvement for three to five years
Jim Butler is online at http://www.jmbm.com/jim-butler.html and http://www.hotellawyer.com.