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Global Hospitality Advisor: The Hotel Market Cycle: Are We At The Peak?

PKF Report: “A wonderful time to be in the hotel business”

Mark Woodworth of PKF Hospitality Research presented the latest statistics to our Meet the Money® crowd to help answer the question on everyone’s mind: Are we at the peak of the hotel cycle? He believes we are approaching the peak of the current cycle and suggests that the industry may “plateau at the peak,” enjoying peak performance for a period of time before a downward trend. Look where we are—things are great!

  • Profits: Up 44% since 2003!
  • Cap Rates: Spreads 38% below historic norm!
  • Values: Prices keep going up!

But are the good times threatened by new supply coming on the market?
Construction costs remain prohibitive. But have we reached the crossover point where building a hotel is more efficient that buying an existing hotel? It is ADR—not occupancy—that justifies new construction, and as the next chart shows, we are close to that point.
ADR has recovered and is growing—and there is plenty of development in the pipeline.
Look where we are as compared to supply growth in the 1990s.
If there is a ramp-up in supply, where will it occur? Possible high supply growth markets include some historically difficult markets such as Los Angeles, New York, Orange County, San Diego and Tucson.
The industry’s performance the past few years have been exceptional. The strength of fundamentals continues to attract capital.
But is the “easy money” behind us? Mark Woodworth says, yes, and here’s why:

  • No more lift from cap rate compression
  • Revenue growth will moderate
  • Expenses keep creeping up: labor and related issues, utilities, property taxes

“The easy money behind us,” he told the audience, but “It remains a wonderful time to be in the hotel business!”
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R. Mark Woodworth, President of PKF Hospitality Research can be reached at 404.842.1150 or Mark.Woodworth@pkfc.com. For a copy of PKF’s “2007 Annual Trends” which is now available, contact Claude.Vargo@pkfc.com.