March April 2018

www.calodging.com March/April 2018 15 STR’S JAN FRIETAG IS PROJECTING a continued healthy demand environment for the U.S. hotel industry with supply increases more pronounced in the top 25 markets. They expect that those markets will again see the brunt of new supply openings as the year starts. Good news is, however, that the number of rooms in construction is not growing rapidly anymore, which bodes well for national occupancy levels going forward. PwC’s Scott Walker reported that the calendar is very important to Q1 because Easter and Passover both fell there and they do not this year. He reported that USTA is concerned about international arrivals and that the political climate is having an effect. I would disagree given the tax reform and deregulation bump we see. CBRE’s Mark Woodworth is forecasting U.S. RevPAR to increase in the 3% range driven by rate. He cited the Index of Leading Economic Indicators published by The Conference Board began increasing at an elevated rate since February 2017. Lodging demand typically responds six to eight months later. These are good signs for U.S hoteliers. Oil prices are back up, interest rates remain low albeit forecast to inch up and the economy seems stronger than what we had initially forecasted last year. Gross domestic product may actually approach 3% in 2018 if tax reform kicks in, personal income growth is strong and low unemployment together with very strong corporate earnings indicates that both the leisure and corporate traveler have the means to travel and pay for lodging. California Lodging Industry New supply is not likely to stop the continuation of positive RevPAR growth for 2018. Banks will begin to put the brakes on lending in time to avoid approving deals that are just too late in the cycle for aggressive underwriting. That means those who are experienced, have solid equity, strong brands or unique ideas, are in great markets and are considered trustworthy and solid borrowers will be able to develop so long as their leverage requirements are not considered frothy. Increased developer cost of capital, new supply and Airbnb and others in the “sharing economy” are marginally reducing feasibility. California has been resilient. People outside the state have already forgotten about our wildfires that devastated much of our state. But while many of our residents lost their homes and even some of our hotels burned down, we are very strong people in a very strong market. What we must do is protect our business interests and avoid the combination of high health care and payroll costs and regulations that strangle us. Today’s labor costs represent nearly 45% of hotel costs when we factor in worker’s compensation, health care costs and other payroll related expenses so we must hire the best available talent, and they are getting more and more expensive. Distribution costs, due to reliance on OTAs as a direct substitute for poor performance of weak brands and the needs of independent hotels to be relevant, have been increasing, according to Kalibri Labs. So the only downside to 2018 might be a lack of growth in profits despite increased revenues. We believe that hotel stocks are already factoring in a healthy uptick based on tax reform though it’s not clear how much lower taxes will strengthen business travel. Factors such as increased supply, low inflation, the sharing economy and rate transparency make it more difficult to raise rates. Other challenges include the lack of buying opportunities. Is there a deal waiting for you out there? It is a seller’s market to be sure! Let us hope for a year without terrorism and crazy climate events—good luck in 2018!  California’s Hotel Industry Why 2018 Will Be Great By Bob Rauch, President of RAR Hospitality  San Diego San Diego should see continued strength from all market segments. Convention Center groups are down but leisure is up and corporate is stable. Supply is increasing in downtown but demand should absorb most of it. 2017 finished at over 77% occupancy and $160 average rate for a RevPar of almost $124. Of that, 78% is reachable in 2018, largely due to the tough finish San Diego had in December due to wildfires. La Jolla and coastal areas did well with over 5% ADR growth last year. We expect to see ADR at $165, up 3% from 2017.  Los Angeles LA finished 2017 at a very respectable 80% occupancy, down one point due to the extra occupancy levels picked up due to the Porter Ranch Gas Leak in 2016. Rates were up to over $175 in 2017 from $172 in 2016. Expect solid growth in 2018 with rates rising to the $180 level at stable occupancy. There is new supply coming in, especially downtown. This will begin to have some impact soon. San Francisco RevPAR could start to benefit from Moscone Center gradually coming on line in the second half of 2018. Group mix overall should also improve as the Moscone Center in San Francisco completes renovations. Citywide room nights for San Francisco are up 20% for 2018. We expect occupancy levels to finish at 84% at $245, up over $15 or 7% from last year and up almost two occupancy points from 82%. M A J O R M A R K E T S About Bob Rauch Bob Rauch, CHA, is a nationally recognized hotelier and President of RAR Hospitality, a leading hospitality management and consulting firm, and one of the fastest growing hotel management companies in the industry. Rauch has more than 40 years of hospitality-related management experience in all facets of the industry, and is currently a Faculty Associate at Arizona State University where he teaches Entrepreneurial Recreation and Tourism.