Panelists Discuss U.S. Lodging Industry Forecast; 6% RevPAR Increase Predicted for 2014 & 2015

19 March 2014
R.A. Rauch & Associates (RAR)

R.A. Rauch & Associates (RAR) hosted Onward & Upward: A Lodging Industry Forecast for 2014 on Friday, March 14, 2014 at the company's owned and managed Hilton Garden Inn San Diego/Del Mar. RAR president and renowned "hotel guru" Robert Rauch co-moderated the event with San Diego economist Gary London, president of The London Group Realty Advisors. The distinguished panel also included leading hospitality attorney Guy Maisnik, Partner, Vice Chair, Global Hospitality Group at JMBM; market leading hotel broker Alan Reay, President, Atlas Hospitality Group; and digital media and sales specialist Sandra Shapira, Director of Sales, TravelClick.

The five panelists shared their thoughts to an audience of hotel owners, operators,

investors, and service providers about the state of the lodging industry, particularly in Southern California, and the positive trajectory and outstanding valuations being realized. Gary London began the event with a brief talk on the state of the economy and the long tail economic recovery given the depths of the Great Recession and the sluggish recovery that followed. According to London, San Diego will continue to add jobs to the local economy in 2014.

Bob Rauch provided his forecast that Revenue Per Available Room (RevPAR) - a key

metric in the hotel industry - will increase 6 percent in 2014, and 6 percent in 2015 after increasing 5.4 percent last year. This growth is fueled by growth in group, corporate, and leisure travel. Rauch also expounded on three key issues facing the hotel industry: Chinese travelers, the rising impact of Millenials, and the importance of digital marketing. Nearly 100 million Chinese travelled overseas in 2013 and that number is expected to increase by over 10 percent in 2014. If the US receives its fair share of these travelers, at least 10 million Chinese tourists, primarily on leisure, will visit the US in 2014. The average length of a trip for Chinese travelers is 7 days and the average spend per person is $8,000. If San Diego recognizes its fair share of just one percent of this business, the result will be 700,000 room nights which will drive occupancy levels 5 percent higher. A key factor in getting more Chinese travelers to San Diego is an increased number of direct flights between San Diego and Asia. At present there is one daily flight between San Diego and Tokyo.

Rauch continued to discuss the importance of courting Millenials (typically people born

between 1980 and 1995) who he described using three "W"s - wired, web savvy, and word of mouth. Millenials prefer user generated content and when searching for hotel options, they prefer social hubs with quality food and beverage. Brand loyalty is not nearly as important as word of mouth feedback from their network. Hotels need to address the needs of Millenials in their design, their service offerings, and the reliability of their wifi.

The digital marketing explosion is proof positive that the hotel business is truly a

science and no longer the art it used to be. Whether it is distribution channel management, social media marketing, reputation management, or the fact that a significant portion of hotel bookings now occur from mobile devices, digital marketing is a necessity in today's competitive landscape. Rauch also explained that the industry is in the early stages of monetizing social media, a potential game changer that will demonstrate positive ROI far beyond the hotel industry.

JMBM's Guy Maisnik discussed the impact of international and particularly Chinese

investments on the U.S. hotel market. International capital was held back from investment opportunities for a lengthy period as a result of the Great Recession and the sluggish recovery that followed. That capital now needs to find a home and the U.S. market continues to be the most attractive market because of long-term economic stability and a strong rule of law. These factors, in addition to a higher quality of life and better education for their children, are an impetus for the capital flight of Chinese investors moving money from China to the U.S. Many of the Chinese investments are all cash deals that drive up valuations and leave lenders in a bind. Maisnik reminded the audience that the last time the market was flooded with so many cash deals, the Fed was created so the full impact of the onslaught of Chinese investment is still to be determined on the overall economy. And while Chinese investment in California is most evident in San Francisco and Los Angeles today, it is only a matter of time before these investments find their way to San Diego.

Atlas Hospitality Group's Alan Reay discussed the astounding increase in valuations of

hotel properties. Reay explained that the total dollar amount of acquisitions was up 35 percent last year and the median price per room skyrocketed 40 percent year over year in San Diego. Valuations are up dramatically because of record profitability, a huge constraint on new supply as a result of a lack of available land in many major markets, record low interest rates, and higher demand for hotels by REITs and global capital. The market is ripe for hotel development because the financials make more sense to build ground up then when a thirty plus year old asset is selling for prices of $200,000 to $300,000 per room. Reay shared with the audience that he is now involved in a number of transactions in which he is selling hotels to developers who simply tear them down and build new, particularly in San Diego. The lack of land and no need for rezoning makes this option attractive, especially when there is major pressure from the brands - Hilton, Marriott, IHG and Starwood in particular,- to make major upgrades to assets that are as little as fifteen to twenty-five years old to cater to Gen Xers and Millenials.

TravelClick's Sandra Shapira expounded on San Diego's lodging industry recovery

sharing that San Diego is one of five markets in the U.S. that is already pacing nearly 10 percent ahead of last year for future bookings; the other four markets are Atlanta, Denver, Minneapolis/St. Paul and Tampa. She also reiterated the theme that the hotel industry is now a science and no longer an art because with so many tools available to hotel operators across all aspects of operations, it is crucial that hotels capitalize on cutting edge technology and invest in brain power to manage these tools.

R.A. Rauch & Associates (RAR) offers the full spectrum of hospitality management services to owners, developers, lenders and investors in hotels and resorts. Headquartered in San Diego, CA, the properties under management and/or ownership include luxury boutique, branded and independent hotels throughout North America. Formed as a hotel consulting firm in 1990, RAR acquired its first hotel in 1997 and has since developed several hotels. As the firm created success for its owned assets, development into a third-party management company began in 2011. For more information on the firm, contact Robert Rauch at rauch@hotelguru.com. RAR is a privately held firm based in San Diego. More information can be found on our website: www.rarhospitality.com.

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R. A. Rauch & Associates, Inc.

11025 Vista Sorrento Parkway
San Diego, CA 92130
United States
Phone: 858-523-0590
Fax: 858.523.0591
www.rarhospitality.com

Lauren Pastore

Phone: 508-404-7930
lauren.pastore@rarhospitality.com