After several years as the wallflower of commercial real estate, the hotel industry has moved to the center of the ballroom. Occupancy rates are up, and room rates-although still trailing inflation-have finally started to improve.
The average hotel room generated a pretax profit of $1,129 in 1993, compared to a profit of only $159 in 1992. The gain is particularly impressive when compared to 1991, when the average room produced a loss of $719.
The data come from the Host Report, a joint effort of Arthur Andersen & Co. and Smith Travel Research. The latest Host Report is based on information from 2,700 hotels.
Not all types of hotels share equally in the recovery. The most successful are the all-suite properties, which include Embassy Suites and extended-stay facilities like Residence Inn.
Limited-service hotels, those with limited or no restaurant and meeting facilities like Courtyard and Hampton Inn, continue to do well.
The biggest turn-around in 1993, according to the Host Report, came in the full-service category. This group of traditional hotels, like Marriott, Sheraton and Stouffer, showed a pretax profit of $715 per room. This was the first profit for this segment in four years.
The luxury component of the full-service group-brands like Ritz-Carlton, Westin and Four Seasons-showed the greatest growth in demand last year.
At the low end of the industry, 1993 was not so wonderful. The Host Report said the demand for budget properties declined 0.7 percent. Budget chains include Motel 6 and Super 8.
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The industry’s overall return to health can largely be explained by basic supply and demand. Growth in demand last year was four times stronger than growth in supply, the best such ratio in at least five years.
The drop in new hotel construction was caused by the same condition that constrains all real estate developers, turning off the financial tap. The banks and thrifts and insurance companies that financed the overbuilding of the late 1980s are no longer making many hotel loans.
Occupancy increased to 63.7 percent, from 61.8 percent in 1992. The Host Report expects continued improvement in occupancy rates.
In recent years, the industry has found it easier to improve occupancy than to increase rates. The average daily rate grew to $60.99 in 1993, from $59.84 in 1992.
Such rate growth still lags inflation. The increase in rates last year was 1.9 percent, compared to an increase in the Consumer Price Index of 2.9 percent.
“There’s no question about the recovery,” said Hal Leonard, general manager at the Ritz-Carlton in Clayton, Mo.
The best proof of the industry’s return to health is that investors now want to buy hotels.
“All of a sudden the hotel industry is ‘hot’,” said Francis J. Nardozza of KPMG Peat Marwick in a recent report. A prime example: The Morgan Stanley Real Estate Fund spent $633 million to buy the 210-hotel Red Roof Inn chain.
A study by Hospitality Valuation Services in Mineola, N.Y., found that there were 42 hotel sales in 1993 that topped $10 million, up from 41 such sales in 1992.
“With a generally positive outlook for the hospitality industry, sales activity continues to heat up and a continuation of a significant number of higher-priced hotel transactions is anticipated for 1994,” said Daniel Lesser, senior vice president and director of consulting for HVS.
The St. Louis market mirrors the national recovery in hotel performance, said Gary Andreas, a consultant and partner at Tellatin, Louis & Andreas here. In fact, last year the budget hotels in the metropolitan area outpaced their counterparts nationally, he said.
One suburban budget property even exceeded 100 percent occupancy. It caters to truckers, and last year sold some rooms more than once a day.
William Buck, general manager of the Embassy Suites in Laclede’s Landing, said his hotel is having its best year since it opened in 1985.
The biggest near-term worry for Buck and his staff is the threatened baseball strike. The “Cubbie weekends,” when the St. Louis Cardinals play the Chicago Cubs, are the best weekends of the year for the Embassy Suites, and one more remains on the schedule.
“A baseball strike would be a financial disaster for all downtown hotels,” Buck said.