2005 National Lodging Report
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R EAL ESTATE A DVISORY SERVICES !@# 2005 National Lodging Report INTRODUCTION Dear Colleague, Overall US Estimates We are pleased to present the 2005 edition of the Ernst & Young National Lodging Report. Our National Lodging Report offers our assessment of the direction of the U.S. lodging industry, including our thoughts on key lodging industry trends and segment performance, as well as our detailed outlook for major metro- politan markets. Additional copies of this report are available through our local offices or on our Web site http://www.ey.com/us/reas. I would like to thank the Hospitality Services professionals who contributed significant time and effort in preparing the 2005 National Lodging Report, including Georgianne Fsadni, Aaron Greenman, and Rebecca Hart. E&Y’s Hospitality Services professionals provide developers, lenders, owners, and operators with an array of advisory services each year. Please feel free to contact me or any of the professionals mentioned at the end of this report if we may be of service. Sincerely, Michael Fishbin National Director Hospitality Services Ernst & Young Real Estate Advisory Services CONTENTS Industry Overview ...................................................02 Atlanta ..................................................................................27 Top Ten Thoughts ......................................................05 Boston ....................................................................................35 Spotlight Segment: Chicago ................................................................................43 Luxury ......................................................................................14 Dallas ......................................................................................51 Spotlight Segment: Upper Upscale ..............................................................16 Hawaii ....................................................................................57 Spotlight Segment: Las Vegas ...........................................................................65 Upscale .................................................................................18 Los Angeles ......................................................................73 Spotlight Segment: Midscale With Food and Beverage ..............20 Miami ......................................................................................81 Spotlight Segment: New Orleans ...................................................................91 Midscale Without Food and Beverage ........22 New York ..............................................................................99 Spotlight Segment: Economy ...............................................................................24 Orlando .............................................................................109 San Diego ......................................................................115 San Francisco ..........................................................123 Tampa .................................................................................131 Washington, D.C. ...................................................137 INDUSTRY OVERVIEW The lodging industry continues to show significant improvement and, given the current economic environment and outlook, we anticipate its positive trends will continue at least for the next 24-30 months. Strong RevPAR performance at urban and airport hotel locations and improved midweek RevPAR performance indicate the return of corporate travel demand, while leisure demand continues to remain healthy, though could be impacted by the volatility of gasoline prices. The current supply pipeline remains rela- tively thin, boding well for the overall industry, which after four years of recovery, is antici- pated to exceed the peak performance levels achieved in 2000. Hotels regained pricing power in mid-2004 and we anticipate further improvement in 2005 with ADR increasing 4% to $90. Coupled with a 1.7 percentage point increase in occupancy to 63%, we anticipate total U.S. RevPAR to increase 6.9% to $57, above the $55 RevPAR level achieved in 2000. Lodging owners and developers continue to experiment with mixed-use real estate products and creative financing structures such as condominium-hotels, while national brands focus on expanding across pricing segments and gaining market share in high-barrier- to-entry markets. Across states, the importance of properly placing tourism dollars is gaining attention as cities strategically plan to improve or expand convention facilities and meeting planning amenities. The lodging industry is not without challenges, as rising labor, insurance, and energy costs pressure margins and increasing interest rates may modestly temper profit margins in variable rate situations. However, with overall operating structures and break-even points lower than in cycles past, the effect of interest rate increases is less worrisome. 2 Lodging Market Occupancy, ADR, RevPAR Performance UNITED STATES %&$ +$ %$$ ,$ *$ *$ ($ )$ &$ $ ($ &$$$ &$$% &$$& &$$' &$$(9 &$$)9 Lodging Market Change in Monthly Occupancy, ADR, RevPAR Performance UNITED STATES &$ %$ $ ?JA'%%& ?JA'%%' ?JA'%%( ?JA'%%) ?6C'%%& ?6C'%%' ?6C'%%( ?6C'%%) D8I'%%& D8I'%%' D8I'%%( D8I'%%) 6EG'%%& 6EG'%%' 6EG'%%( 6EG'%%) !%$ !&$ !'$ 3 top 10 thoughts TOP 10 THOUGHTS 1 Hospitality Investing: What a difference a year can make. Improved hotel operating performance over the past year — and the anticipation of contin- ued improvement for the foreseeable future — has led to positive investor sentiment and increased capital markets activity in the sector. According to a recent report issued by Principal Real Estate Investors, Real Estate Research Corp., and Torto Wheaton Research, unleveraged average annual returns for full-service hotels are anticipated to exceed 13% over the next 10 years, with real estate investment alternatives performing at single digit growth rates (approximately 7% to 9%). As annual returns in lodging are anticipated to be greater than for other real estate asset types, real estate investors appear to be showing more interest in the lodging sector. As a result, even private companies are raising funds in the public markets, including Sunstone Hotel Properties, Inc., Strategic Hotel Capital, and Eagle Hospitality Properties Trust, which together raised more than $770 million in public offerings in 2004. Other initial public offerings were planned, but postponed (by CNL Hotels and Resorts and Capital Lodging). Public companies have also taken advantage of increased demand for lodging investments as secondary equity issuances topped more than $1 billion in 2004. Similarly, the debt capital markets experienced a flurry of activity in 2004, with hotel CMBS issuances raising more than $7 billion for hotels (through September 2004), an increase of more than 60% relative to the same time period the last year. The Blackstone Group launched itself to the top of 2004’s lodging transaction scene, acquiring Extended Stay America, Prime Hospitality Corp., and Boca Resorts, for an aggregate value of more than $5.2 billion, taking these companies out of the public equity market arena to Blackstone’s privately held portfolio. Although interest rates are anticipated to increase in 2005, a relatively low rate environment coupled with contin- ued improvement in operating trends should fuel strong activity in the capital markets over the next 12 months. 6 2 Lodging Fundamentals: How about that! Lodging stocks ahead of the curve. Continuing improvement in lodging fundamentals continues to provide support to large publicly traded lodging company valuations. In 2004, the majority of the publicly traded lodging companies outperformed the overall market, as the S&P 500 index (as of December 16, 2004) saw a 7.8% increase during the year. Comparatively, among the large cap c-corp lodging companies, the average price appreciation was approximately 38%, driven by improving RevPAR performance and a favorable supply and demand imbal- ance that is expected to continue for some time. Even so, the significant price appreci- ation in the lodging sector far above the market over the past year indicates that additional value enhancement will be somewhat more difficult to accomplish. While most Wall Street analysts continue to view the industry favorably, there is less suggestion of wide- spread out-performance in the sector in the year ahead. 3 Supply & Demand: Building confidence in lodging supply levels. Over the past three years, the number of available hotel rooms across the U.S. has grown minimally, helping the pace of the recovery as industry fundamentals slowly turned pos- itive. While changes in lodging demand generally attract more headline attention, it is arguable that the cyclical nature of the industry’s supply growth plays a greater role in lodging performance. Changes in lodging supply typically manifest in three-to-five year cycles, driven by the current economic environment, availability of financial resources, and the amount of time needed for new construction to be developed. Supply growth increased 3% to 4% annually from 1997 through 2000, followed by a sequential slow- down in subsequent years to reach cyclically low levels of 1.3% growth in 2003 and an estimated 1.1% growth in 2004. Given the severe performance declines in 2001, 2002, and 2003, the financial markets have been strict in terms of funding new projects and development activity remains at historically low levels. With the recovery in lodging