The hospitality sector is coming back along with the improving economy

Rick Tobin, real estate financier, First Financial Bancorp

As published in Scotsman Guide's Commercial Edition, November 2013.

Since the credit crisis, the travel and hospitality industry has taken a nosedive as a result of many factors that led to decreased leisure and business travel. From high gasoline and airplane costs to stringent security measures at airports and other travel venues, many people have been dissuaded from travel, even if they could afford it. 

The good news is that things have begun to pick up again, with several indicators pointing to a recovery in the travel and hospitality industry in general. Commercial real estate brokers who work in this niche should expect a renewed interest in the various properties that cater to this sector. They also should keep an eye on the following six trends that have contributed to the revival of travel and hospitality. 

1. Staying local

In large metropolitan areas like Southern California, people have been choosing to go on vacation within a two- to four-hour drive time rather than heading to local airports for flights across the country or abroad. As a result, many local hotels and motels have registered higher occupancy and daily room rates in recent years. 

2. Limited construction

Like any other type of commercial real estate property type, the hotel and motel industry has been hit with high mortgage-loan default rates in the past few years. As a result, many lenders have shied away from extending purchase, refinance or construction loans for hospitality properties, regardless of their size. With limited construction and new properties coming online in the past few years, new competition for existing hotel and motel property locations has decreased. 

3. Remodeling properties

Because it’s typically cheaper and more efficient to remodel existing hotels and motels than to build brand-new properties, more hospitality property owners have realized that it can be an exceptional investment to upgrade their properties, which potentially increases their room rates, annual net operating income and occupancy rates. 

In many hotels and motels across the country, old boxy televisions are being replaced with stylish flat-screen televisions, in addition to new kitchenettes, wood floors and plantation shutters instead of shabby old multicolored carpets and drapes. In addition, bars, restaurants and pools are becoming more of the norm. 

4. Internet and social media

Similar to homebuyers who typically begin their search for a new home on the Internet, a higher percentage of travelers are searching for the best travel bargains online first. Savvier travelers, young and old, are beginning to pay attention to more of the travel bargains being offered by hotel and motel owners with either little advance notice or a fair length of notice.

In addition, more hospitality property owners are using various social media websites (such as Facebook, Twitter and Pinterest) to attract visitors. When travelers have a positive experience at these resorts, they tend to share their thoughts with friends or acquaintances in the social media world. For hotel and motel owners, this is just free publicity. People are more likely to hold their friends’ opinions about a hotel in higher regard than the opinion of a travel critic they’ve never met before.

5. Improving indicators

Hotels’ average-daily rate (ADR) and occupancy rates have increased steadily in the past few years, and that trend is expected to continue. This year, the industry is expected to record a 1.4 percent increase in occupancy to reach 62.2 percent, and gain 4.2 percent ADR to $110.61. Revenue per available room (RevPAR) is expected to increase by 5.7 percent to $68.85, according to data from Smith Travel Research (STR). 

In 2014, STR expects hotel occupancy to grow 1.3 percent to 63.1 percent, ADR to increase 4.6 percent to $115.73 and RevPAR to grow 6 percent to $72.97. 

6. Better financing

Despite recent increases, interest rates remain at, or near, record lows. It is not uncommon for hospitality property owners to qualify for fixed-rate loans in the range of 4 percent to 5 percent, with much longer loan terms and significantly lower mortgage payments.

In addition, flagged or franchised hotels have been easier to fund because of the typically more professional management and marketing efforts by their parent companies. Mom-and-pop motels and hotels also may qualify for better loans today because of lower projected monthly mortgage payments and the potential for improved net operating income.

Funding for hospitality properties also is available from various sources — from government programs to private lenders. The U.S. Small Business Administration’s 7(a) and 504 programs are attractive, intriguing and viable loan options for hotel and motel property owners who may or may not qualify with local community banks in urban and rural regions. With the availability of different financing options, property owners can have access to much higher leverage percentages, larger loan amounts and significantly better interest rates.

Commercial mortgage brokers also can help owners get financing for multiple properties at the same time with some of the more flexible hotel- and motel-loan options. They also may look into available cash-out options for new improvements and/or cash reimbursements that can help increase their net monthly cash flow. Keep in mind, however, that with the eventual increase in interest rates, today’s opportunities may not last much longer.

• • •

As the economy continues to proceed on the recovery path, the hospitality industry is expected to follow suit. After enduring the challenging years of the recession and finally reaping the rewards of an improving economy, vacations may be in order for many Americans. These individual vacations and getaways are rebuilding and reinforcing the recovery of the hospitality sector as it picks itself up from the doldrums.