The total unleveraged, average annual return on investment in full-service hotels is expected to exceed 13 percent over a 10-year holding period, surpassing returns expected for apartment, industrial, office and retail properties. For a five-year holding period, the average annual return is expected to exceed 15 percent. Hotels in "only a few markets are not expected to deliver double-digit returns," the report says.
Raymond Torto, managing director of Boston-based Torto Wheaton, says that "all property types are doing better, but hotels are the only property type that is showing significant rent increases at this stage of the cycle."
Another incentive for investors: Pricing for hotel properties "is a little cheaper than other property types because hotels are coming off" a sharp downturn in business since 2001, Torto says.
The hotel sector is "at an inflection point where we'll see earnings and pricing pick up more than with the other property types, which have held up strong," says Kenneth P. Riggs Jr., chief executive officer of Real Estate Research in Chicago.
Torto Wheaton is forecasting that 2005 will be the peak year for growth in revenue per available room, or revpar, a profit measure for hotels that combines room and occupancy rates. Torto Wheaton expects revpar for full-service and limited-service hotels to increase 10 percent and 8 percent, respectively, this year. Revpar at full-service hotels is expected to rise 7 percent in 2005, 4 percent in 2006 and 3 percent to 3.5 percent after that. Revpar at limited-service hotels, which typically are hotels that don't offer food and beverage service, is expected to grow 7 percent in 2005, nearly 5 percent in 2006 and 3 percent to 3.5 percent after that. Overall, revpar is expected to hit $43,924 in 2005, near the previous high of $44,138 set in 2000.
Hotels in Atlanta, Los Angeles, Philadelphia, San Francisco and Seattle are expected to experience the strongest revpar increases, of 15 percent to 20 percent, during the next two years, says Petros Sivitanides, a Torto Wheaton senior economist who follows the lodging sector. And he expects a nearly month-old labor dispute at 14 hotels in San Francisco will have "limited" impact on the market.
Hotels in New Orleans, Pittsburgh and on Long Island, N.Y., are "the only major markets that will see revpar declines" of 6 percent, 3 percent and 3 percent, respectively, during the next two years, says Sivitanides, because supply in those areas is exceeding demand. Revpar at hotels in West Palm Beach, Fla., are expected to remain flat.
Also working to the advantage of hotel investors is the fact that the sector has experienced limited new construction, unlike other property types.
In addition to rising occupancy and room rates within the hotel sector, there's a lot of room for investors to increase productivity in hotel operations and reduce the volatility of revenue.
For instance, hotel operators are beginning to integrate new technology, such as adding kiosks to hotel lobbies, where guests can check in or check out on their own.
Outsourcing is another avenue hotel operators are taking to reduce costs and improve revenue. Hotel operators increasingly are outsourcing hotel services and functions that historically have been the least profitable — or even money-losing — operations, such as food and beverage service, hotel restaurants and spas.
