Hotel Sector Benefits from Low Supply

Historically low supply bodes well for the hotel sector, which is currently witnessing increased demand from travelers, according to industry experts.

"Fundamentals look very strong in the second half of the year," said David Loeb, analyst with Robert W. Baird and Company Inc., in an interview with REIT.com. "There's very little supply growth and demand trends have been surprisingly strong."

Year to date through June 25, the hotel sector had gained 6.6 percent, according to FTSE NAREIT U.S. REIT Index data.

With supply growth projected at less than 1 percent through the end of 2012, Loeb said the gap between demand for rooms and supply would likely continue to widen.

Jason Lail, manager of the real estate research group at SNL, agreed that the lack of new hotels being developed, coupled with a growing demand is driving the positive fundamentals.

"Upcoming new supply is limited, with only three hotels currently in construction for all hotel REITs. This limited new supply should have a positive impact on rents and occupancy going forward," Lail said.

Despite macroeconomic uncertainties, occupancies are rising, particularly in top urban gateway markets, according to Lail. As a result, he said hotel operators have been able to push room rates more aggressively.
Lail said the average rate per available room (RevPAR) has moved from $95 in the fourth quarter of 2011to more than $98 in the first quarter of 2012.

"Hotel REITs grew funds from operations (FFO) on average by 6.1 percent during the first quarter of 2012," said Lail, adding that hotel REITs' average FFO is projected to grow by 18 percent from 2012 to 2013.

Loeb said he anticipates the gap between the growth in demand and supply of hotel rooms will persist in the near term as developers face limits on their ability to construct new hotels.

"Financing for new construction is really scarce. I think it will be a while before we see ample construction," he said.

One area where debt financing is readily available is the transaction market, according to Lail. This may enable hotel REITs to pick up the pace in regards to asset acquisitions.

Those opportunities may come from resort hotels. In a video interview with REIT.com, Laurence Geller, president and CEO of Strategic Hotels & Resorts Inc. (NYSE: BEE), noted that consumer confidence among leisure travelers appears stronger than it is among corporate customers.

"The most interesting thing about them is that they have no supply," Geller said in reference to resorts. "Whereas an urban hotel could be built in potentially three to five years, it's probably a decade before we see a major resort."

If there is one factor working against the hotel sector currently, it could be business travel.

"There is some concern that corporations will reduce budgets related to corporate travel as companies may choose to be conservative in that spending until after the election," Lail said.