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HVS: Kenya

HVS ·18 April 2018
MARKET PROFILEKenya lies along the eastern coast of Africa. An estimated (2016) 46 million people reside in Kenya with a population increase of around one million people per annum. Kenya is establishing itself as an important gateway to the high growth East Africa region. In November 2016, Kenya was in the top 10 most improved economies in the annual World Bank report on the ease of doing business. The country moved up 21 places from 113th to 92nd. Kenya is outperforming most of its African counterparts in terms of infrastructure with a number of large projects expected to continue attracting foreign investment. In addition, the country has just completed the SGS acquisition of compliance certification in the Oil and Gas sector and the oil sector is thus expected to become a significant economic driver.Kenya has made significant structural and economic reforms that have contributed to sustained economic growth. The country has received support of the World Bank Group, International Monetary Fund and other development partners and they have brought positive economic changes to the country. The new constitution and improved court system pushed investor's confidence and improved the political situation in the country.ECONOMICAL BACKGROUNDSince 2015, Kenyan economic growth has been relatively stable and is expected to reach 6.0% in 2019. The diversification of the Kenyan economy, with a burgeoning technology sector, is likely to slightly reduce the trade deficit over the next five years. In 2016 Kenya had strong GDP growth thanks to the country's currency stability, low fuel prices and low inflation rates. In 2017 GDP growth dropped to 4.9%. This slow-down is due to the drought that impacted both the agricultural output and the generation of hydropower. In addition, the challenging access to credit for the private sector combined with the election-related uncertainty that weakened private investment had a negative impact on the national economy. However, being one of the most stable economies in Africa, Kenya will offer an increasing number of opportunities for investors which are likely to boost the economy further in 2018. The presidential elections had a negative impact on tourism in Kenya in 2017. However, the overall ease of security concerns and the conclusion of the elections are likely to have a positive impact on tourism. The recovery of tourism and the growth of domestic tourism will have a positively impact on the Kenyan hospitality.The rest of this article focuses on the largest market in Kenya, namely Nairobi.HOTEL PERFORMANCE IN NAIROBINairobi remains a leading destination in Africa for leisure and business. Over the past 5 years, hotels' performance has declined due to security concerns and political instability. After a period of stability in 2016, performance declined further in 2017 due to the election-related political instability and the depreciation of the Kenyan Shilling to the US Dollar.In addition, the significant increase in room supply resulted in increased competition and a drop-in occupancy despite an increase in international visitations. In 2017, occupancy was down to 49% at an average rate of KSH12,952 according to the last Cytonn's Nairobi Hospitality Sector Report. However, this decline is temporary, and hotels' performances are expected to recover following the result of the elections that brought investors' confidence back. Historically, occupancy has immediately bounced back in the post-election year.TOURISM DEMANDTourism is one of the top sources of foreign exchange earnings in Kenya, spurred mainly by international visitor arrivals. However, 2016 saw an encouraging rise in the number of visits to the country. After two quiet years, the situation in Kenya started to ease and the confidence returned frombusiness and leisure travelers. The government has been involved in the promotion of tourism abroad and is supporting and marketing the country to the international and domestic markets. In addition, the rise of Nairobi and Mombasa as key conference destinations boosts the number of international and domestic trips to Kenya. As a result, 2017 saw a clear increase in visitation to Kenya and in earnings from tourism. The industry is well placed to benefit from political stability in 2018.Nairobi is a hub airport in East Africa. Kenyan Airways has been very active in the past few months with the acquisition of new aircraft and the opening of new routes. The airline has just announced the launch of the first-ever route to the United States; the daily non-stop flights to New York will start in October 2018 and is likely to boost tourists' arrivals in the next few years.HOTEL SUPPLY IN NAIROBIGoing forward, an impressive number of hotels are expected to open in Nairobi in the next two years which is likely to have an impact on the hotels' performance in the short-term. There is a particular push from global hotel chains seeking to tap into this African hub and the opening of new quality supply makes it a leading destination in East Africa. Hilton just opened a Hilton Garden Inn at the airport and City Lodge added 151 rooms in the new Two-Rivers node in the north of Nairobi. Marriott becomes competitive in the Kenyan market with the opening of a Four Points in 2018 and another JW Marriott scheduled in 2021. Radisson Hotels and Accorhotels announced the opening of a Radisson Blu Hotel & Residences and a Pullman respectively in 2019. Many unbranded quality properties are also expected to add rooms into the market, bringing the total rooms' pipeline to 2,397 rooms. Such an increase in supply is likely to significantly impact occupancy and rate as the market will become more competitive and it will take a few years to absorb the new supply. The entrance of new branded supply will put independent property under pressure and potentially push them to seek branding in the next few years.INVESTMENT MARKETNairobi's hotel market is rather illiquid due to the lack of transactions in recent years. However, as the security concerns are lifted, and the political situation improves, investors are likely to regain confidence and interest in the market. Capitalization rates are expected to remain stable in the next few years whilstREVPAR and values are likely to increase.OUTLOOKNairobi's significance as a transport hub and financial centre for the greater East African community and the various tourist attractions are expected to continue to support growth over the short and medium term. Its tourism infrastructure remains far more developed. In addition, the increasing amount of foreign investments combined with the growing number of major international companies settling headquarters in Nairobi will induce additional demand from the corporate market. Following the conclusion of the presidential elections, we expect the demand to pick up. However, Nairobi will likely suffer from an oversupply in the next few years as a large number of hotels are expected to open in the next few years and the capital will need time to absorb the new supply. Outside Nairobi, there are several important tours and cities perfectly placed to grow and which require mid-market hotels,aimed at the local market.

F&B: Which Is More Profitable - Outsourcing or In-House?

HVS ·18 April 2018
Hotel Food and Beverage (F&B) operations increased in revenue value by 4.9% during 2017, according to a report from STR. This is clear evidence that F&B is still an important revenue stream, second to accommodation income, but it is profitable only if companies optimize the way they operate the division.Outsourcing is a popular way to take the problem off a company's plate, but is it necessarily the best option for their hotel and bottom line? At HVS, we believe that profit should not be the primary motive and that the main reason for having food and beverage facilities in a hotel is to enhance the Rooms Division revenue. This enables the hotel to offer dining facilities for guests, while the restaurant benefits from access to a continuous stream of potential diners.With demand expected to remain strong enough to deliver growth of 5% in 2018, it is clear that maintaining the F&B function is still a viable strategy for most hotels. The question is: How do hotels maximize their profits from F&B while simultaneously ensuring they provide quality service to complement their other offerings?F&B Delivers 25% of RevenueFood and beverage typically represents around one quarter of a hotel's total revenue. Measuring profitability can be challenging and is such an integral part of a hotel's operations that isolating its contribution to the annual results can be difficult. A 2016 analysis by CBRE Hotel's Americas Research of the financial performance of F&B showed banqueting food services delivered 36.5% of the total F&B revenue, followed by 21.1% from other food venues in the hotels and 11.9% from beverage venues.To keep up this level of turnover, many hotel chains are re-engineering their food services to showcase flexible lobby and outdoor spaces that encourage social interaction. Locally sourced offerings are in high demand; thanks in part to the environmental movement and socio-economic factors. Adopting this trend helps hotels compete against local restaurants, which are also trying to own the "planet-friendly" space. Hotels, meanwhile, are placing extra emphasis on upscale, casual dining to attract a wider range of guests and provide a quality overall dining experience.In Favor of In-House ServicesMany hotel operators learned a steep lesson in the past by outsourcing food services to high-profile chefs and restaurateurs. It was a great idea for a while, but a five-star environment where guests have high expectations and anticipate an Iron Chef popping out from the kitchen was doomed to failure in most parts of the world.When it comes down to brass tacks, the reasons most hoteliers give for outsourcing their food and beverage services are that they simply do not have the skills in-house to manage them, and that hotel guests mostly do not dine in their hotels (although breakfast dining trends have been shown to invalidate this claim).Many hotel owners, managers and operators have realized that by pursuing an in-house solution instead of abdicating their F&B responsibilities to third parties, they can simultaneously address the current need for differentiation, create exciting options for their guests, and preserve F&B outlets as profit centers in their hotels.BenefitsThe benefits of keeping F&B in-house are numerous. You get to keep creative control of the offering for both in-house guests and destination diners. You retain the ability to add to your revenue and profit streams, and your hotel is empowered to provide career opportunities for the members of your Food and Beverage teams. A hotel that has a management or culinary team and infrastructure in place to support the development of an in-house restaurant and/or bar concept can only be a good thing. RisksNaturally, there are inherent risks in attempting to manage such a specialized service. It can also be challenging for a team to market a hotel restaurant as a destination for non-hotel guests. To do so, you will have to set aside the budget to build and maintain the facilities, employ trained and experienced staff, deliver exemplary food and service, and promote the venue. This can be a tall order for any team more experienced in offering room accommodations than food services, and it can potentially result in the operation becoming a low-profit-margin business.Making the In-House Model WorkOne company that has successfully developed an in-house model is UK-based Ennismore, which is currently expanding The Hoxton from a single hotel to a multi-property organization in the US and Europe. With an open-house concept and lobby, The Hoxton has never been just about room accommodations. Several spaces are available for meetings, parties, private dining and the hotel's own events, and restaurants and bars serve coffee, food and cocktails from morning until late evening. They work with local chefs and operators to craft menus containing dishes unique to their market, along with some comfort food classics. The idea is that hotel guests come to immerse themselves in local culture, while locals come anytime.Outsourcing to a Third PartyThe hotel industry has historically outsourced multiple functions to food service operators, security companies, parking operators, landscapers, concierge services, laundry providers and sound/audiovisual professionals. They do this to keep up with the changing labor market demands, manage increasingly high benefit costs and better meet the needs of their guests. Options for outsourcing in 2018 are even broader, as vendor companies begin specializing in certain niches and offering improved efficiencies for lower costs.Primary Success FactorsKey issues when you are considering outsourcing an F&B function are finding a reputable service provider who understands the market and audience, ensuring there is no reduction in quality or control, and balancing the efficiencies gained by outsourcing with the desire to build the expertise and talent on your team.Another important matter is choosing the type of arrangement to conclude with the food service operator. This could take the form of a lease agreement, a management contract, a consulting arrangement or a licensing agreement (or any combination of these). Issues driving this decision could include the term of the arrangement, the services to be provided and the fee structure. A lease agreement works best, for example, when a hotel has several restaurant facilities and plans to outsource only the specialty restaurant with its own kitchen and storage areas.The decision to outsource F&B should never be based on "getting rid of a problem" and should rather be aimed at providing more accountability to the service delivery standards. This approach will enhance the opportunities for both guests and management.BenefitsThe benefits of outsourcing include some obvious advantages, such as the fact that service providers are subject matter experts in their field. Outsourcing gives your hotel the opportunity to:Earn a reliable revenue stream from rent, whether the contractor's company is profitable or not. Even if the rental agreement is tied to turnover, such agreements usually leave "wiggle room" for both parties to ensure it is a viable deal during a slower economy.Keep your staffing consistent, without having to adjust it to meet market demands for F&B.Avoid having to implement cost-cutting measures that impact the overall operation of the hotel.Enjoy the ability to offer hotel guests a reliable food and beverage service, regardless of any labor issues affecting your company.Deliver a heightened focus on excellent food services, which is difficult to match when F&B is a peripheral service for your team.Display the dedicated expertise and resources to meet the challenges of the environment, which an established third-party F&B provider has.Leverage economies of scale in purchasing, assuming the contractor's operation includes more than just your hotel's F&B services.The overall advantage of all these factors is a seamless experience for the guest that complements the efforts of the hotel.RisksThe primary risk facing hotel management from a third-party F&B outsourcing agreement is the loss of control over their service offering. This is often not limited to operational jurisdiction, but applies equally to creative control over the concepts, the promotions, the marketing, the special offers and the effects on profitability of all these facets of the business.Taking an Innovative ApproachThe hotel industry offers many examples of outsourcing, such as the NYC-based Al Fiori restaurant at Manhattan's Langham Place hotel. The high-end French-Italian venue operates under different ownership than the adjoining Bar Fiori, so working together is paramount to offer guests a seamless dining experience. The restaurant also collaborates with hotel staff and external parties like Uber to develop opportunities for diners both on and off-site, which increases revenue and ultimately enhances profitability. This innovative approach to an outsourcing arrangement illustrates how lateral thinking can positively impact the results.Choosing a ModelAs is so often the case with options, each scenario for managing your F&B operations has its pros and cons. While it is obvious that financial benefit is a vital aspect of the decision, hotel owners also need to determine which route fits in best with their own investment time frame. If a lender is involved in hotel ownership, they should be consulted to avoid any after-the-fact complications from their direction.Both outsourcing and development of a new internal concept are important projects that require a lot more attention and focus than going along with the traditional hotel dining room premise. The returns are likely to be more beneficial as well.

The HVS Quarterly Hong Kong Update

HVS ·18 April 2018
Visitor ArrivalsTo sum up the year of 2017, the city's tourism recovery is reflected in the 3.2% YoY increase in visitor arrivals to over 58 million, an additional 1.8 million over 2016. In particular, the arrivals growth from the Philippines (+13.1%), Japan (+12.6%), and South Korea (+6.8%) underpinned the Hong Kong tourism market.In the fourth quarter of 2017, Hong Kong recorded its highest number of visitor arrivals in three years. With a strong 6.0% YoY increase, over 15.8 million travellers visited the city compared to 14.9 million in the last quarter of 2016. The top five feeder markets (in order of size) are mainland China (+8.0%), Taiwan (+2.3%), South Korea (+8.2%), the United States (-3.2%), and Japan (4.3%).Accounting for 75.4% of total visitor arrivals, mainland Chinese visitors registered an impressive 8.0% YoY growth to 11.9 million in the fourth quarter of 2017. The reduced number of negative news about Hong Kong residents' sentiments toward mainland China aided the return of visitors to the city. In addition to the more welcoming atmosphere in the city, the fourth quarter also carried more holidays including the Golden week and Christmas. The Golden week is seven days of Chinese national holiday in October. This year, it overlapped with the mid-autumn festival and prolonged the holiday by an additional day. Mainland Chinese tend to travel during this holiday, and Hong Kong benefited from it when it recorded a 8.3% YoY growth of visitor arrivals in October. Meanwhile, December also attracted 7.2% more Chinese visitors compared to the same period last year to 4.2 million, the busiest month in terms of number of visitors in the fourth quarter.Besides mainland China, the North Asia market's robust growth of visitor arrivals to Hong Kong was noticed in the fourth quarter of 2017, in which South Korea posted an 8.2% YoY increase to 398,000 and Japan registered a 4.3% YoY increase to 322,000 visitors. The growth is highly driven by the increasing popularity of Hong Kong and Macau among North Asians, along with the rising number of budget flights from South Korea and Japan. Overnight Visitor ArrivalsIn the fourth quarter of 2017, Hong Kong received a 6.8% YoY increase in overnight visitor arrivals to 7.6 million, which is equivalent to 48.2% of the total number of visitors. The top five feeder markets (by order of size) are China (+10.5%), South Korea (+9.1%), the United States (-2.9%), the Philippines (+8.1%), and Japan (+7.2%). Compared to the fourth quarter of 2016, Taiwan fell out of the top five ranking.Although the Philippines is not one of the top five feeder markets in visitor arrivals, it posts as the fourth largest feeder market in overnight visitor arrivals in the fourth quarter of 2017. Among the rising number of Filipino travellers, 87.5% of them stayed overnight. Its robust growth of 8.1% YoY--equivalent to an additional 16,600 visitors--amounted to 222,000 in the fourth quarter. The growth is to some extent attributable to the increasing Filipino domestic helper demand in Hong Kong, which also provides a reason for Filipinos to travel to Hong Kong to visit friends and relatives.The decline of overnight visitors from Southeast Asia and South Asia continued into the fourth quarter of 2017, given the slowing regional economies, which encouraged travellers to travel to destinations closer to home, as well as other regional travel destinations such as Taiwan and Japan; both have loosened visa requirements toward Southeast Asia travellers. Explicitly, negative YoY growth of overnight travellers was recorded from India by -13.4% to 67,000, Singapore by -9.6% to 161,000, Thailand by -5.9% to 130,000, and Malaysia by -4.4% to 137,000. Meanwhile, Indonesia saw a marginal increase of 1.7% to 103,000. This can also be attributed to compression from higher-spending source markets, displacing value-oriented travel demand. Hotel Sector PerformanceBoosted by the robust return of overnight visitors, the Hong Kong hotel market recovered by maximizing occupancy levels while recovering average rate. In the fourth quarter of 2017, hotel occupancy reached its highest record at 93.0%, a one percentage point increase from the same period in 2016. The growth of occupancy is also accompanied by the rising average rate (ADR), which registered a 3.2% YoY growth to HK$1,493. This is the highest ADR the Hong Kong hotel market has witnessed since the third quarter in 2014, before the decline in mainland Chinese tourists to the city. The growth in both occupancy and ADR successfully pushed the city's Revenue Per Available Room (RevPAR) up 4.3% YoY to HK$1,388 in the fourth quarter of 2017.Particularly, the Medium Tariff hotels segment recorded an impressive 16.0% YoY growth in RevPAR by having a 13.9% increase in ADR to HK$885 and a 1.8% increase in occupancy to 95.0%. Likewise, High-Tariff B hotels also recorded a 6.1% increase in RevPAR to HK$1,179 with a different growth strategy. The increase in RevPAR is entirely driven by ADR, which saw a healthy 6.5% increase to HK$1,273, while trading off on occupancy with a 0.4% decline to 92.7%. This reflects the shift in the demand base among High-Tariff B hotels to less price-sensitive source markets, particularly from North Asia.On the contrary, the fourth quarter marked the third consecutive quarter that High-Tariff A hotels posted negative growth in RevPAR. With a 2.0% decrease in ADR to HK$2,320, occupancy among High-Tariff A hotels only enjoyed a 1.8% increase to 91.3%, ending with a 0.2% decline in RevPAR. However, this is considered as a rebalance of demand to include more value-oriented segments as supply continued to increase to drive up occupancy. Hong Kong Hotel Sector Performance - SupplyAs of 2017, there were 277 hotels and 1,469 guesthouses in Hong Kong, housing a total of 91,000 rooms. This figure reflects solid growth in hotel supply of 4.0% compared to 2016. In particular, High-Tariff A and High-Tariff B hotel rooms expanded at a YoY growth rate of 5.5% and 4.5% to approximately 18,500 and 30,000 rooms, respectively; accounting for 20.6% and 32.9% of total hotel room inventory. In the fourth quarter, The Murray, A Niccolo Hotel in Central (336 rooms) and Emperor Hotel in Wan Chai (299 rooms) were the most notable additions to hotel supply.Looking forward, a number of long-awaited hotels will be opening in the upcoming years, namely Ocean Park Marriott Hotel (472 rooms), the Rosewood Hotel in Tsim Sha Tsui (413 rooms), Hotel VIC in North Point (671 rooms), and St. Regis Hotel in Wan Chai (129 rooms). Additionally, the opening of the Hong Kong-Zhuhai-Macau Bridge in 2018 and subsequent tunnel from Tuen Mun to Lantau will help to further develop the hotel market in Tuen Mun. Existing properties include the recently opened Pentahotel and the up-and-coming Hotel COZi Resort (430 rooms). With the improving transportation infrastructure that will bring in more travellers, particularly the high-speed rail terminus in West Kowloon scheduled opening in September 2018, we anticipate the hotel supply market in Hong Kong to remain upward and competitive.
Article by Court Williams

The Growing Use of Technology and Robotics in Food Service

HVS · 6 April 2018
Reasoning Behind the ShiftEver since vending machines started to dispense food in 1897, food service automation has gained ground, moving towards self-service and eventually machine services. There are multiple reasons why food service companies are looking for alternatives to the traditional ways of producing and serving food, including:The shortage of kitchen workers, which is a major concern in many areas where hospitality and food service are big businesses. For example, employee turnover in the U.S. restaurants and accommodations sector was 72.9 percent in 2016, according to minimum wages that came into force in 19 states during 2017, with other states expected to follow. This factor contributes to a sizeable increase in food preparation and service costs, resulting in higher prices for the customer--increases which in many instances the market is not yet ready to tolerate.Better profitability, which is precipitated by faster delivery and lower costs, and stronger market performance. For example, Dominos stock price rose from $13 seven years ago to over $200 in 2017, partly as a result of its introduction of voice-ordering capabilities and other technology solutions.All are very good reasons to replace human workers with robotics. A spokesperson for McDonalds cited these as well as the "tremendous" margin of human error, poor hygiene, a lack of education and laziness as additionalreasons for the shift towards automation.Food Services Currently Using RobotsHere are some great examples of the progress made towards the use of food producing robots:Sally the Salad Maker is a robot making real inroads into food production, specializing in salads. Sally is about the size (and shape) of a dorm-room refrigerator, and can deliver up to 1,000 different types of salad in 60 seconds while you watch. The robot uses 21 pre-prepared ingredients and can create salads based on extremely precise caloric information. Sally is the brainchild of Chowbotics, Inc., for whom HVS is currently conducting a candidate search for the position of VP Sales.California's Miso Robotics has developed an AI kitchen assistant named "Flippy" who helps with grilling, frying, food preparation and plating. It has software that integrates with sensors and cameras that enable it to "see" the food and handle functions like temperature control.American food service companies aren't the only ones interested, either. Fanuc in Japan uses robots to cook and serve four types of noodle bowls in 90 seconds, which sell for the high price of $10 each.The Wall-E restaurant in China's Hefei Anhui province has a robotic workforce of 30 4-foot high units that take orders, cook, bake and serve by moving along tracks in the restaurant. The robots don't do any cleaning, however--that is left to the humans!Other technological applications in the industry include Eatsa, a Silicon Valley-based chain of quinoa-only restaurants, which uses iPads in place of cashiers and servers and pops out food orders from a wall of high-tech cubbies, and McDonalds, which plans to spend more than $50,000 to install self-ordering kiosks and launch improved mobile app ordering and payment options at 20,000 restaurants in 2018.Benefits to the Food Service IndustryThe shift to food producing robots offers substantial benefits for the industry. Since some states have a major shortage of kitchen workers, the ratio of demand to supply has caused compensation costs to soar. In the San Francisco Bay area, for example, a line cook costs around $40,000 a year. Robots, however, don't require sleep, don't take vacations and hardly ever get "sick." Apart from the obvious advantages of reducing employment costs, other labor-related benefits include the elimination of:Vacation and sick leave absencesWorkplace concerns, such as personality conflicts and unfair labor practicesTraining costs and poor education problemsLower number of human errorsIn addition, we can expect to see robot use resulting in less waste and safer food handling procedures, both of which are critical issues for the 21st century.Looking to the FutureFood producing robots certainly seem to have a brilliant future, given the multitude of potential markets for them. The creators of Sally, for example, have a grand vision for her, according to Bloomberg. They are hoping to see her installed in hotels, convention centers, airports and gyms--wherever visitors check in late or room service is less than efficient.Fast food chains will be able to exponentially increase their menu offerings, as well as adding healthier options with very little additional labor cost or other factors. Most types of robotic food preparation still require a component of human interaction, which fact offers entrepreneurial opportunities in itself.Counting the CostsAt this point in time, robotics are not cheap. The restaurant version of Sally the Salad Maker currently costs around $30,000, although lease opportunities are available. The Wall.e's workforce comes in at $10,000 per robot, and while Flippy is touted as a "$0 an hour" worker, obviously that is not the whole story. Whatever the cost, if food companies and restaurants compare it with labor costs, wastage, theft and other expenses, the investment begins to look very attractive.It stands to reason some sectors of society will be unhappy about the idea of robots taking over human occupations, but even while Sally's design makes human salad makers obsolete, it creates new jobs for food preparation workers.A New RevolutionThere's a new revolution taking place in food production and service, which includes complex processes such as preparation, cooking, delivery and serving. Robots are already routinely used for many of these tasks, and in activities where speed, consistency, sanitation control and high levels of repetition are required, they almost always beat human workers in terms of efficiency.

Barcelona's Stress Test - Will the hotel market ride it out? | By Magali Castells & Sophie Perret

HVS · 5 April 2018
IntroductionThis article presents recent supply and demand trends for Barcelona, before discussing some of the sociopolitical events that have impacted the market over recent months, as well as their effect on hotel performance and the outlook for the coming year.Barcelona is Spain's second-largest city, with a population of approximately 1.6 million in 2017, and is the capital of Catalonia. Located on the Mediterranean coast, 180 km southwest of the French border, Barcelona is the country's principal seaport and is the third-largest port in the Mediterranean region.Since the organisation of the Olympic Games in 1992, Barcelona has become a favourite short-break leisure destination in line with cities such as Paris, London and Amsterdam. It is also an increasingly important port for cruise ships. In addition, Barcelona is an established centre for meeting, incentive, conference and exhibition (MICE) business: the city was 3rd in the International Congress and Convention Association (ICCA) ranking in 2016 with a total of 181 meetings.Tourism DemandSince the global economic slowdown after the financial crisis in 2009, the total numbers of visitors and bednights in Barcelona has been increasing year-on-year, resulting in an overall compound annual growth rate of 2.8% and 3.8%, respectively, from 2006 to 2017. 2016 was a very good year with approximately 9 million registered visitors to the city, 9.2% more than 2015, driven by both domestic and international tourists. This growth continued throughout 2017, which was the best year so far with more than 9.3 million visitors and just short of 20 million bednights, an increase of around 3% on the previous year (see figure 1).A substantial number of visitors to the city arrive on cruise ships that choose Barcelona as one of their preferred Mediterranean destinations (see figure 2).There is a substantial influx of day tourists, especially during the summer. Passenger movements more than doubled from 2006 to 2017. In order to curb this growth (or at least take a financial advantage of it), a new day tourist tax is currently being evaluated; this could substantially impact cruise tourism, since one ship alone can bring several thousand tourists to the city for the day.Source MarketsIn 2017, the main feeder markets in terms of arrivals to the city of Barcelona were domestic visitors (20%) followed by the USA (10%), the UK (9%), France (8%), Italy (6%) and Germany (5%) as the main sources of international visitors (see figure 3). This distribution of demand has remained fairly unchanged over the past eight years.SeasonalityBarcelona is one of the major short-break leisure destinations in Europe and, as such, has a relatively broad seasonality, with the lowest months being December and January. Its strong reputation as a MICE destination also contributes to this. In 2017, hotel room occupancy was over 50% every month of the year. During the summer, market occupancies hover around 80-90%, demonstrating the city's popularity (see figure 4).ConventionsThe city of Barcelona has long been and still is an internationally recognised destination for meetings, inentives, conferences and exhibitions (MICE) business. According to the ICCA, in 2016 Barcelona was in third position in the world ranking of organisers of exhibitions and congresses, directly after Paris and Vienna (see figure 5).Hotel SupplyThe number of hotels and rooms in Barcelona has been growing steadily over the past few years, in line with the increase in demand. As a result, the total number of hotels and rooms have increased at a compound annual growth rate (CAGR) of 5.6% and 5.4% respectively, from 2008 to 2016. This increase has been especially driven by the increased supply in four-star hotels, growing at a CAGR of 8.5% over the same period (see figure 6).However, as expected, the tourism moratorium put in place in July 2015 (see panel to the right) has had a major effect on the hotel supply. Since the start of the moratorium, the strategy has resulted in the paralysis of at least 38 hotel developments in the city, accounting for expected losses valued at approximately EUR3 billion and several thousand jobs. Only the few projects that were granted permission before this new law will be able to enter the market in the coming years, and the future for new hotels thereafter remains uncertain. Accordingly, only six hotels have either recently opened or are expected to open in the next two years in the city, adding up a total of approximately 1,000 new rooms to the market, a mere 2.5% of the current supply (see figure 7).Tourism MoratoriumIn May 2015, Ada Colau was elected the new mayor of the city. Leading a coalition of environmentalists and social activists, she announced that the city's tourism strategy would change radically in order to ensure more 'quality tourism' for the city. As a first step, in July 2015 the mayor placed a moratorium on approving new hotel developments and short-term rentals for the following 12 months. This tourism moratorium was extended in 2016 for an additional year, preventing the opening of new hotels and other tourist accommodation.Eventually, in March 2017, the tourism moratorium was substituted by the Special Tourist Accommodation Plan (PEUAT), approved by Full Council on 27 January 2017. This law regulates the introduction of tourist accommodation establishments, as well as youth hostels, collective residences with temporary accommodation and tourist apartments. According to the city mayor, it will allow for a sustainable and responsible tourism model and will reduce the pressure in the most saturated neighbourhoods in the city. The different areas are presented in the map below. Market PerformancePartially due to the moratorium, supply growth since 2015 has been limited, but demand has continued to grow, leading to an increase in occupancy and average rate. As a result, RevPAR increased by 3.7% in 2015 and a further 10.7% in 2016 reaching EUR111(see figure 8).2017 figures indicate a continued upward trend mainly due to an increase in average rate, with sustained RevPAR growth over the same period last year. Although hotels in Barcelona experienced substantial performance declines following the 1 October Catalan Independence Referendum (see panel to the right), 2017 still shows positive results overall. The year can be clearly divided into before and after the vote. Year-to-September 2017 figures showed double-figure RevPAR growth of around 15%. This trend was reversed from October onwards, with a reduction in RevPAR of between 10% and 20% each month to December. However, results for the year were still positive by the end of 2017.2018 performance is expected to recover as long as the political situation does not create any further civil unrest and demonstrations. However, 2018 is expected to be a relatively slow year for the conference segment, as normally these events get booked some time in advance and several for this year have already been changed to a more stable destination. We understand, for example, that Seville had the strongest Q4 on record on the back of the Catalonian strife. In the meantime, year-to-date performance for Barcelona up to February 2018 shows RevPAR up by around 4% on the back of a strong ADR.1 October Catalan Independence ReferendumThe quest for Catalonia's independence from Spain has generated instability in the region and Spain overall.Although deemed illegal by the Spanish government and Constitutional Court, a referendum on independence was held on 1 October 2017. Results showed a 90% vote in favour of independence, although with a low turnout of only 43%. On the day of the referendum, the National Police Corps and the Guardia Civil intervened and raided several polling stations, creating social unrest, continued demonstrations and riots which became an international issue. This impacted both national and international demand to Barcelona for the following months.In new regional elections held in Catalonia on 21 December 2017, pro-independence parties retained control of parliament. Forming a government, however, remains extremely complicated as the former president, Mr Puigdemont, remains in exile in Belgium and the former vice president, Mr Junqueras, is in prison.There is still a palpable fear that sustained political instability will continue to negatively affect the Catalan region and Spain overall. Several businesses have changed their corporate addresses to other parts of Spain in recent months to guarantee continued access to the domestic market and the wider European Union in case of independence. As a result, the level of economic uncertainty in the region has increased while the crisis has also hit tourism and foreign investment in Catalonia. It is expected, however, that should the political situation be resolved without creating any further civil unrest, tourist demand in 2018 and thereafter should soon recover to historical levels. The economic impact on the sector from potential independence is still too difficult to assess, and is likely to only become somewhat measurable once there is more clarity about the political direction for the region.Investment Environment2016 and 2017 have been characterised by a slowdown in the purchase of new hotels as well as the acquisition of buildings for hotel development in Barcelona. This has been mainly due to the strong uncertainty affecting the city of Barcelona after the introduction of PEUAT and the activities of the independence movement.The most notable single asset transaction in Barcelona in 2017 was the 430-room Hilton Diagonal Mar, which was acquired by AXA Investment Management from Iberdrola in November (see figure 9). For further details please refer to our report HVS European Hotel Transactions published in March 2018.On the back of strong rate growth, from a pricing perspective values per room have shown impresive growth in Barcelona in the last seven years (see figure 10). Values per room already surpased the 2007 peak of EUR316,000 in 2016, on a nominal basis. For further details please refer to our report HVS European Hotel Valuation Index published in March 2018.Conclusion and OutlookBarcelona continues to be one of the most successful European short-break destinations and is likely to continue to be so over the years to come, regardless of the political and governmental changes that may lie ahead.Without the shadow of a doubt, the introduction of the moratorium and PEUAT has been beneficial for existing hotels by increasing occupancy and average rate levels, for the foreseable future. It has also, nevertheless, generated a certain level of uncertainty in the development of projects, which could potentially dent some investors' appetite for the city. Other detinations such as Madrid have somewhat benefited from this situation.In the short term, the political state of affairs has generated a period of uncertainty which impacts the property investment market in Barcelona. A prolongued period of political instability could cause deals to slow down or even stop. However, a softening of demand for hotel accommodation is only likely to happen should there be more civil manifestations. Overall, we remain strongly optimistic that the Barcelona hotel sector will continue to be a key source of investment for those global players who are interested in the medium- to long-term growth perspective, as well as knowledgeable intra-regional investors who are seeking to consolidate their ownership position in markets that they are already familiar with.

Transformational Spa and Wellness Value Propositions

HVS · 5 April 2018
We are living in a time centered around people, purpose and progress. While the need to remain adaptable and manage one's daily schedule endures. Lifestyles are evolving led by a multitude of new social, political and professional changes. This has created a substantial and prevalent focus on being happy, and living with passion, energy and a sense of personal well-being. The natural outcome of these changes generates a profound shift in thinking. As more people become increasingly self-aware, this impacts a number of things, including personal values and life goals.Until recent years, the trickle of change has been steady and slow. Today, we are living in a time when people are seeking personal growth and transformation more than ever before. According to a study by Marketdata Enterprises "Americans spent $11 billion in 2008 on self-improvement books, CDs, seminars, coaching and stress-management programs." Now, a decade later the self-improvement market has continued to cultivate its offerings and merge into a massive global wellness and lifestyle marketplace.Over time, these products and services have surfaced with more depth and diversity. These tools have significantly advanced their reach and include a wider audience of people. An unyielding selection of resources can be found to enhance one's personal development, no matter who you are or what you're seeking. The internet has further expanded this arena with a host of mobile apps to choose from, YouTube, and so on.Depth and VarietyMuch like the self-help market has evolved to expand its industry and audience, the hospitality market is tasked to do the same. Hotels are being called to answer a global cry for services that concentrate on an enormous spectrum of personal well-being. Since, the definition of wellness touches nearly everything in the realm of hospitality- from food and beverage lineups, quality of rooms, and meeting space to spa and fitness departments; transformational value comes into play when there is a specific niche, need or opportunity. Filling this need denotes new value propositions which launch modest wellness themes to the next level in service and scope.Raising the BarHotels and resorts have the rare opportunity to engage people in suggestive ways throughout their stay. Programs focused on supporting personal-development and transformation can present powerful options for individuals seeking a lush experience tied to personal growth and inner-discovery. As an industry, it's time to raise the bar when it comes to solely offering conventional amenities and services.While skin care and massage services make up the majority of traditional treatments, there is meaningful momentum backing alternative therapies, healthy living and services tailored to mind, body and spirituality. "Complementary or alternative therapies, such as reiki, energy work and acupuncture, are available in 27% of spas," according to the ISPA 2016 U.S. Spa Study. This study also states that "Mind, body and spirit programs are available at 17% of U.S. spas." Many of which also include meditation, yoga and relaxation classes. Altogether these aspects are fixed to the fervor surrounding well-being. They also epitomize new opportunities for growth.Types of ServicesImplementing services that inspire people to take a profound personal journey, amasses a wide range of advantages for the individual and the property. Be it through active meditation, astrology, grief counseling, sleep aids and analysis, or esoteric, creative and deep spiritual healing. People seeking wellness are looking for exceptional prospects to improve their lives. Having the ability to access new techniques and treatments enrich not only the quality of their stay but can improve their entire lives. There's no question the request for advancing services is here. However, this pursuit requires commitment, grit and the agility to explore new possibilities.Customer Demand"Traditionally, the Baby Boomers have been the main consumers of self-improvement. They still are an important group, but the tide is shifting. Millennials are the future for this market, but there are few experts now catering to them." A reported "94% of millennials participate in the practice of self-improvement, 84% of Baby Boomers and 81% of Gen Xers" are engaged in personal development. This illustrates the opportunity to capture a wide audience of people who are seeking to improve themselves. The demographics of this market feature enable a creative, multi-generational approach to new program creation. This also engages guests to explore personal relevancy and value, through cross-department services. Tailoring programs to suit different age groups, genders or life circumstances, i.e. The Passionate Journey, created by Anne B. Emerson, can customize unforgettable and personalized experiences. Life is unpredictable. There are more uncertainties, doubts and issues of unease effecting people worldwide. For many people, peace of mind and stability are hidden within daily pressures and stress. Therefore, services that provide respite from worry and stress become prized experiences. And expanding this reprieve by introducing innovative methods that encourage the management of Self, empowers people even further.Going Above and BeyondPresenting opportunities for guests to have meaningful uncommon services, opens up a new dialogue. While fitness and movement activities may appeal to some, fitness does not equal well-being for everyone. Athletically fit does not necessarily equal healthy and well-balanced. Wellness is holistic. The routes to health and happiness, vary for everyone. Emotional and spiritual health are frequently unchartered waters in the hospitality industry. However, these types of services often facilitate significant breakthroughs and a montage of transformations. Depending on the type of treatment or service, suggesting new products, books, mediation tools, and so on, can offer supportive insight and encourage ongoing and future practice. Incorporating retail selections to support these types of services, not only increases the average customer spend but also provides a product selection beyond traditional spa retail. These items can include a small selection of books, journals, daily rituals or positive meditations. Items that have a tone of self-discovery or suggest an uplifting buy, such as novelties and gifts can also help boost retail performance overall.Know Your LimitsEnumerating the definition of hospitality-driven wellness raises three important questions. First, what is the perceived value of wellness and transformation for your specific guests? This is broadly different based on property type, location, and concept. Urban hotels have distinctly different guest profiles than resorts or destination hotels. Knowing the pillars of what wellness means for your property, plays a critical part in customizing your strategy and goals. Second, how innovative is the property, management team and ownership when it comes to developing advanced services? If the property is based on long-standing, traditional principles it may be challenging to add new, broad-minded services. In this case, it's best to start with one or two unique offerings. These can be introduced as a special promotion and assimilated later based on interest and engagement. Third, what are the risks associated with creating new programs? There are always a series of risks to manage when making any program alterations. Identifying these risks with careful planning, employee training and effective protocols for guest follow-up can help mitigate most of them. One of the biggest threats to the process of enacting new services, stems from employees not fully understanding them. The staff should be well versed in all of its treatments and services, but especially ones that are new and may be unfamiliar territory for people.Advance WiselyChoosing to make the investment to expand programs, spa services or new hotel overlays, becomes relative to the goals of the property. There are a number of factors to consider in doing this. What is the significance of the offering? Does it align with the property's concept and theme? Is the management and staff committed to its success? Is it ideal to partner with outside companies or to hire and train to activate new services? All of these aspects can sway the performance and impact return on investment. Selecting the right partners, and discerning quality providers is an essential part of integrating new programs. It is also key to have skilled employee training to help lay the foundation of any successful expansion. One of the leading factors in creating hotel success is creating a "Unique Experience". Capitalizing on the strengths of the property can have extraordinary advantages. As guest preferences evolve with greater volume and speed, it is essential to work within a stand-up strategic plan to circumnavigate the complete direction. Furthermore, transformational programs are not limited to department exclusive services. These modes can also be integrated into meeting and event space and added to special functions. These programs can be stimulated further by creating special retreats and crafting them into different guest packages.Final ThoughtsTransformation can be a powerful experience. Sometimes, the shift is simply coming back into stride with life, a loved one or letting go of grief, self-doubt or excessive stress and worry. The hospitality industry inadvertently has both the breadth and capacity to impart meaningful change for a lot of people making the move to go beyond general wellness ideals. These integrations can inspire people through transformational experiences, generate substantial revenue and pointedly garner unique property attention. There is a priceless, personal sentiment that goes hand-in-hand with any journey towards personal growth. And the people, places and programs that touch our lives this way can be retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by

HVS: Cape Town

HVS ·30 March 2018
MARKET PROFILECape Town is South Africa's oldest city and the second-most populous city in the country. It is the provincial capital and primary city of the Western Cape. As the seat of the National Parliament, it is also the legislative capital of the country. The city is famous for its harbour as well as its natural setting in the Cape floral kingdom, including such well-known landmarks as Table Mountain and Cape Point. Cape Town is also Africa's most popular tourist destination.Cape Town is one of the most multicultural cities in the world, reflecting its role as a major destination for immigrants and expatriates to South Africa. As of 2016, the city had an estimated population of 3.8 million. The city was named the World Design Capital for 2014 by the International Council of Societies of Industrial Design.EXCHANGE RATE USD:ZAR The economy is sophisticated, relying on the tertiary sector, primarily the financial and insurance sectors, and tourism. Infrastructure is adequate with extensive roads networking the city and the electricity network reaches most areas in the city. However, Cape Town is suffering from a massive drought that has an impact on daily activities and tourism. ECONOMIC INDICATORS - SOUTH AFRICAECONOMICAL BACKGROUNDNumerous scandals of corruption and mismanagement has prevented the economy from growing and fulfilling its potential. GDP growth fell to 0.7% in 2016. 2017 was a year with low growth as the political unrest and the cabinet reshuffle, including the dismissal of the Minister of Finance, deterred investors and the country's credit rating was downgraded. However, the improvement of the world economy along with the stabilization of the commodity prices will sustain growth in the next few years.Since the resignation of Jacob Zuma and the appointment of the new Head of the ANC and President of South Africa, Cyril Ramaphosa, South Africa has a better outlook than previously expected. We can already see positive changes as the Rand has gained strength against the USD by almost 18% over the last 90 days ( In addition, unemployment fell by 1% during the end of last year and is expected to further decrease with the new President in place. Foreign investors as well as the people of South Africa are excited and full of hope with Cyril Ramaphosa, who used to be a successful business man.HOTEL PERFORMANCECape Town remains South Africa's most popular destination when it comes to domestic and international visitors. The city benefits from a good mix of corporate and leisure travelers that leads to relatively stable demand throughout the year. 2016 benefited from a strong leisure demand combined with a limited increase in supply, leading to an increase in occupancy. Although the Mother City saw a significant increase in supply in 2017, the growth in international tourists pushed occupancies up.An increase in demand combined with the opening of several upscale properties allowed Cape Town hotels to grow their ADR over the past three years. The Cape Town hotel market still achieves higher average rate than the country's average or Johannesburg. However, it is important to note that the fluctuations in the exchange rate of the South African Rand has a significant impact on ADR. The future of SA's tourism is looking promising though.KEY METRICS - HOTELS, CAPE TOWNTOURISM DEMANDThe total number of international tourists arriving and staying in South Africa is steadily increasing at a compound rate of 3.9% over the last six years. While the number of domestic tourists remained quite even, the international tourist arrivals have shown a steady annual increase. This consistent growth is on the back of leisure travel to the country. Leisure and holiday accounts for over 70% of international arrivals followed by business and conferences at around 20% of arrivals. With an unstable rand, indeed, while a weak currency may make South Africa a very cheap destination for international tourists, domestic travelers, mainly corporate, may struggle and reduce their travel expenses. VISITATION - CAPE TOWN, 2012- 2017Source: Airport Company South Africa, 2017HOTEL SUPPLYGoing forward, at least six new hotels are expected to enter the market from 2017 to 2020. The recently opened Radisson Blu Hotel and Residences partially opened in February 2017 and was fully operational in May of the same year. The SunSquare Cape Town City Bowl opened in September 2017 along with the StayEasy, adding 504 keys to the city centre supply. Marriott has announced a 2-billion Rand investment in Cape Town adding over 500 rooms to the city's accommodation inventory. These include the 189-room AC Hotel Cape Town Waterfront and the 200-room Cape Town Marriott Hotel Foreshore. Additionnally, one of the first Radisson Red hotels opened its door in the new Silo area at the Waterfront in September 2017. It is likely to be strongly competitive with the proposed hotel owing to its lifetyle and modern concept although it is positioned on a different price point. The new Silo Hotel, opened in 2017 by the Royal Portfolio, is the most luxurious hotel in Cape Town and added a real luxury product to the market. Towards the other end of the market Onomo purchased Inn on the Square and has re-branded the property.The Silo HotelHOTEL PIPELINEINVESTMENT MARKETCape Town's hotel market is rather illiquid due to the lack of transactions in recent years. However, as the city develops, and the political and economic situation improves, investors are likely to show interest in the Mother City.OUTLOOKThanks to the improving economic situation and the ease of security concerns, tourism is likely to enjoy continued high demand in the next few years. However, the Mother City benefits from a strong reputation worldwide and its many touristic attractions will continue to attract millions of tourists every year. Hotels have a huge potential growth coming in the next few years. The increasing interest from major international brands and their development pipeline Cape Town make us believe that the growing demand will support the increase in supply in the next few years.

HVS Market Pulse: Downtown Chicago, IL

HVS ·29 March 2018
Chicago Real Estate DevelopmentDevelopment in the market has been largely centered on multi-unit residential, office space, and hotel rooms. Nowhere is this more evident than in the Loop and West Loop neighborhoods. Of the more than 4.5-million square feet of office space that has been completed in the greater Chicago market since 2015, more than 2 million square feet can be found in Downtown Chicago along the Chicago River. Three major additions to the Chicago skyline in the last two years have included the 1.2-million-square-foot office tower known as 150 North Riverside, and the 1.1-million-square-foot River Point office tower. An 820,000-square-foot office tower, to be anchored by CNA Financial, is currently under construction and is anticipated to be completed in 2018. Even with all the new Class-A office space being added to the market, vacancy rates are likely to remain relatively stable over the next few years, according to REIS. Increased demand in Downtown Chicago has been largely driven by relocations of companies previously housed in the suburbs, with Motorola Solutions and McDonald's being the most recent to have announced plans to relocate their headquarters in 2018. Major international corporations are also relocating to the Chicago metro area from outside of the market; for example, in early 2017, Caterpillar moved its operations from Peoria to Deerfield. The West Loop has experienced the greatest transformation over the last few years, from its beginnings as one of Chicago's meatpacking districts. With parts of the neighborhood once considered "skid row," West Loop's transformation gained momentum about ten years ago with the influx of residential condominium buildings and the opening of some of Chicago's finest restaurants in what was a low-rent, yet proximate, neighborhood. The West Loop's development trend continued with additional growth in the residential sector. In the last five years, several major office and hotel developments elevated rents and lease rates to some of the highest in the city. The neighborhood's hip vibe is bolstered by world-renowned technology employers, including Google, Gogo Inc., and Glassdoor, as well as hotel products like Ace, SoHo House, and the under-construction Hoxton.Major IndustriesThe Chicago area is home to more than two dozen Fortune 500 companies, including Boeing, Walgreen Company, Allstate Corporation, Kraft Heinz, McDonald's Corporation, Abbott Laboratories, and Exelon. These companies cover a wide range of industries, from financial services to food services. The city is also home to several federal entities, including the headquarters for the 7th Federal Reserve Bank District, the U.S. Court of Appeals for the 7th Circuit, and the Northern Illinois Bankruptcy Court. Moreover, Chicago is well known as a major center of global agricultural commodity trading, which is handled by the Chicago Board of Trade and the Chicago Mercantile Exchange (CME). According to Woods & Poole, Health Care & Social Assistance account for more than 12% of the greater Chicago area's workforce. The Chicago area features six medical schools and more than forty teaching hospitals, with Northwestern Memorial Hospital, University of Chicago Medical Center, and Rush University Medical Center representing the largest facilities. In 2015, Northwestern broke ground on the new Simpson Querrey Biomedical Research Building on its Streeterville campus. The innovative facility will include 600,000 square feet of laboratory space for biomedical research in the first phase, to be completed by late 2018, and will eventually be built out in three phases to include 1.2 million square feet of space, employing up to 2,000 people upon completion. Nearby, the Rehabilitation Institute of Chicago's new, state-of-the-art medical facility was completed in late 2016. The $523-million building includes 900,000 square feet of cutting-edge "Ability Labs," 242 patient beds, an auditorium, indoor parking, and a tenth-floor sky lobby. Furthermore, the financial industry acts as a key component of Chicagoland's economy. Chicago is home to the retail financial services and commercial banking headquarters of JPMorgan Chase, one of the largest employers for the market. In 2017, Bank of America announced its new regional headquarters location in the Loop as a part of a larger consolidating effort. The new headquarters will occupy 500,000 square feet of leased space in the proposed 1.35-million-square-foot high-rise located at 110 North Wacker, which is anticipated to break ground in 2018 and be completed in 2020. In June 2017, Toronto-based CIBC acquired PrivateBank's parent company, PrivateBancorp, for $5 billion as a first step in expanding its presence in the United States. In addition, Chicago is home to one of the twelve Federal Reserve Banks located across the nation, as well as the Chicago Stock Exchange.Meetings and ConventionsMcCormick Place, owned by the Metropolitan Pier and Exposition Authority (MPEA) and operated by SMG, is the largest convention center in the United States, with a total of 2.6 million square feet of exhibition space. The West Building offers a 460,000-square-foot exhibit hall, 250,000 square feet of meeting space, and a 100,000-square-foot ballroom--Chicago's largest. The entire McCormick Place complex is linked by a 50,000-square-foot pedestrian promenade, referred to as the Grand Concourse, which contains retail shops and other visitor amenities. MPEA also owns the 800-room Hyatt Regency McCormick Place, which is connected via the Grand Concourse. The level of room-night production by McCormick Place depends on large events that generate between 50,000 and 100,000 room nights per event. Many of these large events rotate among major U.S. convention centers, and the cycle of these bookings is primarily responsible for year-to-year variation in room-night generation. In 2011, the unions at McCormick Place agreed to new work rules that lowered the costs of exhibiting at the center, management of McCormick Place was contracted to SMG, and the MPEA implemented other State-mandated cost reductions. MPEA reports that these changes have positively influenced the ability to book future business. The addition of the 1,205-room Marriott Marquis, which opened in September 2017, could also improve the ability of the MPEA to book smaller conventions that use both adjacent hotels and the West Building. Additionally, a triple-brand, Hilton-affiliated hotel is currently under construction adjacent to the convention center. The Hilton Garden Inn, Hampton by Hilton, and Home2 Suites by Hilton hotels will add a total of 466 rooms to the market when they open in early 2019. Although year-to-year room-night production is likely to continue to vary greatly as large events come and go, room-night generation could reach 1.5 million by 2020. Given that 2016 was an "off year" in the convention cycle, while also considering that Chicago was once anticipated to host the Summer Olympics in 2016, it was a soft convention year, with convention sales teams focusing on replacing large conventions, such as a canceled Microsoft meeting, with a greater number of smaller events. The NFL Draft returned to Chicago for a consecutive year in April 2016. Even though the Draft moved to Philadelphia, Pennsylvania, in 2017, and to Arlington, Texas, in 2018, it is expected to rotate back to Chicago eventually. Furthermore, the October 2017 opening of DePaul University's Wintrust Arena should generate increased demand in the area surrounding McCormick Place.New and Existing Hotel SupplyHotel supply increases in Greater Chicago have reached record levels over the last few years, especially in Downtown Chicago. Notable openings in 2016 and 2017 included the 452-room LondonHouse - A Curio Collection hotel, which boasts a three-floor rooftop bar; the new 287-room Conrad Chicago; the 293-room Gray Hotel by Kimpton; the 159-room Ace Hotel; the 180-room Viceroy Hotel; and the 1,205-room Marriott Marquis hotel at McCormick Place. Nearly 4,000 hotel rooms have been added to the downtown market since January 2016, and this trend is not anticipated to slow. Another 1,500 rooms are currently under construction and scheduled to open in 2018, not including the redevelopment of the former Red Roof Inn and Hard Rock hotels. Although only four of the hotels planned to open in 2018 are in the CBD, they account for more than 50% of the total new supply. Hotels are also expected to open in the Wrigleyville, Hyde Park, West Loop, Streeterville, Old Town, and UIC Medical District neighborhoods in the next two years.ConclusionChicago experienced another record-breaking year in 2017. Occupied room nights reached record levels, and average rates during the peak months were higher than ever before. Demand growth is anticipated to be strong in 2018, led by increased convention business at McCormick Place and additional demand generated by the opening of the 1,205-room Marriott Marquis and the new DePaul Arena; furthermore, the relocation of major international corporations, such as McDonald's, Conagra Foods, Beam Suntory, and Wilson Sporting Goods, will continue to bolster commercial demand in Downtown Chicago.

HVS In Focus: Capri Island, Italy

HVS ·28 March 2018
IntroductionCapri, together with Ischia and Procida, is the one of the three main islands of Campania, a region in Southern Italy with an area of about 13,500 km2 and a population of 5,836,317 (2016). The distinctive features of the region are its mild climate, the abundance of art and historical sites, the strong passion for music and food as well as the presence of Mount Vesuvius, one of the most active volcanos in Europe located in the Gulf of Naples. Being largely washed by the Tyrrhenian sea, many leisure tourism destinations were developed over the years in Campania, such as Capri, Amalfi, Positano and Sorrento; besides Naples, which is the regional capital.Capri's area spans over approximately 10,5 km2, while the inhabitants of the two municipalities (Capri and Anacapri) are about 15,000. Its precipitous coast and its numerous caves give a very peculair configuration to the natural setting of the island. Moreover, Similar to Campania region, music, food and history are always there, but what established the island as such an attractive tourist pole is the exclusivity and the "dolce vita" that visitors experience during their stay, through the sea life and the nightlife, which certainly revolves around the timeless "piazzetta".The charm of this island is remembered since the Roman Empire. Some of the first known admirers and visitors of Capri were the Emperor Augustus, that made the island his private dominion, and the Emperor Tiberius, who built 12 properties to retire from Rome's life, some of them are still visible today. The current tourism status begun with the two World Wars, where the island hosted many political figures which gave birth to a small political-literary oasis. After that, a gradual change of the island's economy accomplished through a progressive decline in agriculture and coral production in favour of the tourism sector.AccessibilityBeing an island, Capri can be accessed by air or by sea.The closest airport is Naples International Airport, about 10 km far from the city's port, while the nearest train station is Naples Railway Station, about 4 km far from the city's port.By air: Capri features a heliport in Anacapri, the upper part of the island, and the main routes are from Naples (20 minutes), Rome (70 minutes) and Ravello (20 minutes).By the sea: the island can be reached by ferry or hydrofoil, mainly in 50 minutes from Naples, 25 minutes from Sorrento or Positano, and one hour from Amalfi.Once on the island, the main square is accessible by car or by public means of transportation (funicular and bus), whereas the shopping streets nearby can be accessed only on foot since they are located in a pedestrian area.Demand for Transient AccommodationPassenger movements at Naples Airport have been increasing at a moderate pace over the past 11 years. The Compound Annual Growth Rate (CAGR) for the examined period was 4.1 % in total, due to a sustained growth of the international inflow, which was 8.3%. At the beginning of the period, international passengers were less than domestic ones at a roughly 45:55 ratio, while after 2010, domestic travelers recorded a steady decrease up until nowadays, where the ratio has been transformed at 65:35 in favor of international visitors. This slump in domestic traffic occurred most probably due to the national economic downturn and, at the same time, to the growth of the high-speed train connections amongst Italian destinations. Furthermore, after a volatile pace during 2008-13, the general traffic shows a stable growth since 2013 and 2017 results registered a vigorous increase of 26.6% compared to same period in 2016.Naples' airport occupies the seventh place in Italy for volume of passengers and features 36 operating carriers amongst main and low cost companies. Currenlty, according to the ACI Europe Award, it is the best Airport in Europe in the category 5-10 million passengers airports. Moreover, believing his potential value, several investements have been materializing such as the opening of the first Capsule Hotel in Italy (open 24/7) and the decision by Michael O'Leary, CEO of Ryanair, to extend the routes number from 19 to 28 starting from summer 2018, reaching this way two millions of passengers volume per year only by Ryanar.Although Naples Aiport connects Italy with many countries, Capri's international tourists use to stop in other Italian destinations such as Rome, Florence, Venice, Amalfi and Positano Coastcities before or after joining the island. Therefore, the most common way to reach the island is by sea through approximately nine different connecting routes from different ports of Campania (such as Naples, Amalfi, Sorrento and Positano). The island constantly receives more than two million tourist arrivals by its Sea Port every year ranged between 2.5 million in 2006 and 2.3 million in 2016 after a fluctuating period. Figures 1 and 2 represent the traffic flows to Naples (by air) and to Capri (by sea). Basic Visitation FactorsNowadays, tourism accounts for more than 10% of national GDP, and in 2016 Campania ranked at the 7th place amongst all Italian regions in terms of bednights (approximately 19 million). Campania is one of the best known and most sought-after tourist destinations in Italy. With its diverse cultural heritage, landscape, environment, and ecosystem, it can meet a wide range of needs and provide a variety of destinations to visitors such as cultural and historical sites as well as beach destinations. Figure 3 depicts domestic and international visitation and accommodated bednights for Capri.Throughout the entire 2006-16 period most visitors at hotels in Capri were of international origin. During the examined decade, international bednights increased from representing 60% of the total market to 68%. The high number of international visitation to the region can be explained by the fact that this area is one of Italy's prime destinations for international travelers. In general, the number of total bednights at hotels in the island has experienced a CAGR of 1.3% in the examined period, from approximately 470,000 in 2006 to about 535,000 in 2016. When compared to the aforementioned seaport statistics, it becomes evident that a large number of disembarking travelers are daily visitors, that spend only a few hours on the island. Domestic bednights decreased at a sustained pace, showing a negative CAGR of -1.8%, while in the same period international bednights raised at a CAGR of 3.2% showing remarkable resilience. The decreasing domestic bednights could be most probably attributed to the shrinkage of disposable income of Italian citizens as part of the economic crisis that has affected the country. Moreover, due to its international caliber, Capri island is considered an expensive destination for Italians, so they seek alternative places within their country to spend their holidays.Main Source CountriesThe main international source market in Capri is the United States of America that in 2016 captured a share of 18% of total bednights, almost three times higher than the markets of Germany and the UK. Nonetheless, special attention should be brought to Brazil and Australia which achieved a CAGR of 13.1% and 15.5%, respectively, at a lower base though. At the same time, bednights from Japanese guests declined recording a negative CAGR of -8.7%.SeasonalityCapri displays a typical seasonality pattern for a leisure destination with peak season extending from end-June to end-August, high-season in May, June, and September, while April and October are considered as shoulder season.Most hotels on the island use to match their seasonal inauguration of operations with Easter holidays, while they close either in mid- or end-October depending on the weather conditions. In any case, annual operation is rather impossible due to the rough sea conditions, not allowing for daily connection by the sea, in conjunction with the closing of most of the tourism-related businesses such as restaurants, bars and so forth. The island is also visited during Christmas holidays, but mainly by people who own properties there; in fact, almost all hotels remain closed in this period.Hotel SupplyDuring 2009-16 the general hotel supply has not changed dramatically, in fact it appears fairly stable with a CAGR of 0.5%. The quantity of four- and five-star hotels has slightly increased whereas, combined together, they represent more than 75% of the island's total room inventory in 2016. On the other hand, hotels of lower classification, experienced a negative trend losing some 100 rooms over the last eight years. Moreover, even though the number of four- and five-star properties has increased in absolute terms, the average size of five-star hotels was reduced from about 60 rooms in 2009 to 50 rooms in 2016 while the size of four-star hotels was reduced from 38 to 35.Growth in the higher spectrum of the market is attributed to the demand of guests looking for higher quality services, while on the other side hoteliers realise that in order to keep their properties competitive they ought to offer such services. The increasing interest in developing five-star hotels can also be attributed to the needs arising from the tourism inflow of affluent travellers from countries with emerging economies in conjunction with the positioning of the destination as a more upscale one. Nonetheless, the total supply is mainly characterized by indipendent hotels, or by small national groups, whereas the international braneded properties are not much established on the island.In general, the destination is characterised by being relatively fragmented with demand outpacing supply whereas the various building limitations on the island enhance this phenomenon. Furthermore, the shrinkage of the number of lower classified hotels can be attributed to the expanding sharing economy where property owners of the island rent their homes through online platforms; thus, satisfying the demand for accommodation of price sensitive clientele and competing with hotels of lower classification or, in some cases, even with four-star hotels.Figure 6 summarises hotel supply in Capri over the past eight years.Upscale Hotels' PerformanceFigures 7 and 8 summarise the important operating characteristics of four- and five- star hotels in Capri. The charts set out the average occupancy, average daily rate (ADR), and rooms revenue per available room (RevPAR) for a sample of eight four-star hotel properties and five five-star hotel properties. For consistency reasons, despite the seasonal operation of the specific hotels, all occupancy percentages refer to 365 days of operation.The four-star hotel market shows a sustained growth of both ADR and RevPAR, respectively at 4.0% and 6.4%, while the occupancy is showcasing a constant but slow improvement at around 2.3%. This trend is probably due to the bnb's growth, which, affecting the four-star market's occupancy as well, implies an increase of ADR as a defense method to preserve the revenues.Regarding the five-star hotel sample's pace, the trend is positive in this case as well. The four years occupancy and average rate witnessed a CAGR of 2.0% and 5.7% respectively, leading to cumulative increase of the RevPAR by 7.8%. This phenomenon could be attibuted to the fact that the limited new additions to current supply, together with the growing number of arrivals and bednights, helps existing properties to push more with higher ADR levels.ConclusionCapri is clearly a popular tourist destination because of its charm, history and its natural configuration. The island is currently constrained by its seasonality, which is essentially a seven-month period that experiences a high-point in July and August with average annual occupancy levels ranging from 43% for four-star properties (approximately 75% seasonal occupancy) to 47% for five-star properties (approximately 82% seasonal occupancy) . Capri remains unique and is high on tourists' lists of 'must see' destinations.Currently the hotel supply seems stable, mainly due to the difficulties in obtaining the permits to build new hotels on the island. Thus, the current hotel market is characterized by relatively small-scale properties mainly managed by boutique hotel operators and usually affiliated with renowned brand consortiums, in an effort to increase sales, while the lack of international hotel operators is obvious. Moreover, the increasing demand for alternative accommodations also contribute to put pressure on the hotel market, including some four-star hotel as well. As for the hotel performances, during the last years Capri's four- and five-star hotel markets are experiencing a positive growth in both ADR and occupancy, at about 3 - 5% per year.Corporate demand in the market is present during the shoulder season (comprising mainly incentives and events from domestic corporations), but visitation is primarily leisure-driven. The port zone is often overcrowded during the day, due to the high number of daily tourists who leave the island after a quick tour, in fact only 10% of the annual registered tourists stay for at least one night.

In Focus: Singapore, Preparing for a Smart Future

HVS ·27 March 2018
According to the World Travel & Tourism Council (WTTC), the direct and total contribution of Travel & Tourism to Singapore's Gross Domestic Product (GDP) was 4.1% and 10.2%, respectively of the total GDP in 2017, making tourism one of the key supporting industries for the economy. In 2017, Singapore's economy outperformed expectations at 3.5%, boosted by robust growth in the manufacturing sector. Bolstered by the uplift in arrivals from Mainland China, Singapore's tourism sector also finished the year on a strong note, up 6.2% year-on-year (y-o-y) in international visitor arrivals (IVA). Singapore's transportation hub, Changi Airport, hit two milestones this year, opening its first high-tech, automated Terminal 4 and welcoming its 60 millionth annual passenger.Having witnessed a solid tourism performance recovery in 2017, the Singapore Tourism Board (STB) built on its Hotel Industry Transformation Map (ITM) launched in 2016. Among the new initiatives is a roadmap for hotels to evolve into "Smart Hotels" through the "Smart Hotel Technology Roadmap". This will serve as a framework for hotel operators and owners to enhance their hotels by adopting technology.Read the full report at

HVS Market Pulse: Berlin - In Search of ADR Growth

HVS ·23 March 2018
This market pulse provides an overview of the tourism and hotel market in Berlin, Germany. It discusses recent tourism trends, challenges encountered in pushing average rate and provides a summary of the extensive hotel pipeline.

HVS Manhattan Lodging Report Q4-2017 | By Roland deMilleret & Nicole Roantree

HVS · 8 March 2018
The New York City borough of Manhattan is among the strongest, most diverse, and most dynamic hotel markets in the world. Manhattan's resiliency has been borne out over the course of recovery from three national recessions since 1989. The following report examines the effects of past recessions on hotel performance in Manhattan, as well as the dynamics of hotel supply and demand and forecasts for the health of the local lodging industry in the near term.Historical Hotel Performance in ManhattanThrough year-end 2016, demand growth modestly outpaced increases in supply; on a twelve-month moving average, supply increased at 4.9%, compared to 5.4% demand growth. This trend continued through year-end 2017, even as supply in Manhattan continued to register a nearly 5% increase on a trailing-twelve-month basis. For the period through December 2017, 3.7% demand growth outpaced growth in supply of 2.6%. The trend of inventory growth recorded from 2009/10 through 2017 is anticipated to continue at record levels through the near term. As will be presented subsequently in this report, supply growth is expected to remain strong through 2019.This is just a sample of what you'll learn from the Q4-2017 Manhattan Hotel Market Overview:Click here to receive a complimentary copy.

European hotel values see impressive gains as demand booms | By Simon Hulten & Sophie Perret

HVS · 5 March 2018
Hotel values across Europe saw impressive growth of 3.9% in 2017 compared with the previous year when values stood still, on average, according to our 2018 European Hotel Valuation Index (HVI), published this week.The HVI monitors annual percentage changes in the value of four- and five-star hotels across 33 European cities, presenting the data in both euro and local currency.'Business and consumer confidence, as well as GDP growth in Europe, are all riding high,' said report co-author Sophie Perret, director, HVS London. 'Hotel demand is strong in the majority of European markets, with low levels of new supply in most cities pointing to robust performances across the board.'Europe's most highly prized cities in terms of hotel values per room remain Paris, London, Zurich, Geneva and Rome, although prices in euro terms have softened year-on-year in all but Paris.Increasing demand for hotel rooms in Lisbon, one of Europe's safest destinations, prompted the Portuguese capital to top the HVI league table in terms of value growth for 2017, up 14.7% on the previous year, and its fourth consecutive year of double-figure growth. Interest in Lisbon among international investors, developers and lenders is on the up, with the city showing strong market fundamentals going forward.Currency fluctuations, as in the past, have produced some contrasting results for various markets when comparing values in euro and local currency. The strengthening of the rouble against the euro resulted in strong gains for hotels in St Petersburg and Moscow, which saw values in euro rise 14.4% and 11.5%, respectively, to rank the cities second and fifth in growth terms. However, when measured in roubles, values in Moscow hotels fell by 1.1% and only grew by 1.5% in St Petersburg.Third in the growth rankings were hotels in Madrid, where values rose 14.1% helped by a strong economic climate and a boost in incoming tourist numbers leading to occupancy and average rate rises. With active investor interest in Madrid, transaction volumes have risen and the city can look forward to a number of hotel projects coming online in the next few years.Value changes in euro were also challenging for the UK, owing to a weak pound, with hotels in each city registering a small decline in euro terms. Birmingham and Manchester hotels saw a slight increase in sterling values. Likewise, London's hotels grew in value by 4.3% in sterling terms on the back of a strong economy and the city's ongoing popularity with leisure and business travellers; hotels in Edinburgh similarly grew by an impressive 6.3% in value. Increasing labour costs and other overheads for UK hotels are likely to continue to put pressure on operating margins over the next 12 months.Istanbul's euro values also declined, by 3.4%, influenced by terrorist attacks, Turkey's involvement in the civil war in Syria and its unstable relationship with Russia. This is in stark contrast to the local currency value, which was up by a healthy 18.7%.'On balance, it's likely that hotel investment will continue unabated in most cities, as strong underlying principles drive value growth, especially for those markets in Eastern and Southern Europe, which haven't yet returned to pre-crisis value levels,' concluded report co-author Simon Hulten, analyst, HVS London.'There are serious gems waiting to be picked up, but you need to know where to look!'Download a copy of 2018 European Hotel Valuation Index by Sophie Perret and Simon Hulten at

HVS: 2017 European Hotel Transactions

HVS · 2 March 2018
This article gives an overview of hotel investment volumes in Europe in 2017, discussing trends and forecasts and providing a comprehensive list of single asset and portfolio hotel deals above EUR7.5 million.

Canadian Lodging Outlook Quarterly 2017-Q4

HVS ·28 February 2018
If you would like a detailed hotel performance data for all of Canada, STR offers their Canadian Hotel Review. The Canadian Hotel Review is available by annual subscription. For further Information, please or +1 (615) 824-8664 ext. 3504.

HVS Market Snapshot Seychelles Hundred Islands of Paradise

HVS ·28 February 2018
Seychelles Tourism Records Stable GrowthSeychelles continues to prove its popularity in the European market as a hideaway holiday destination while gaining reputation in the Middle Eastern and Asian markets.Republic of Seychelles is an archipelago of 116 islands located in the Western Indian Ocean east of East Africa. Across all 116 islands, Seychelles has a total land area of 455 square kilometers. The country consists of two distinct island groups: the Mahe group, in the north, and a chain of low-lying coral islands stretching away to the south. All of the country's principal islands belong to the Mahe group; they include Mahe Island (the largest at 27 kilometers long and 11 kilometers wide), Praslin Island, Silhouette, La Digue and 28 smaller islands. The 83 coral islands are largely without water resources, and most are uninhabited. The population of Seychelles (2017 estimate) is 93,920. Victoria, on Mahe Island, is the capital, principal city and leading port of Seychelles. While more than 75% of the country's population lives on Mahe Island, about 10% on Praslin, and others on La Digue and the outer islands.ANSE INTENDANCE, MAHEVisitor ArrivalsSeychelles is known for its coral beaches, opportunities for water sports, UNESCO heritage sites, its abundant wildlife and nature reserves and its year-long tropical climate. The government of Seychelles strictly controls tourism development in the country to protect and conserve the fragile ecosystem of the islands, and also to enable the long-term sustainability of the sector, which depends heavily on the country's ecological offerings. According to the National Bureau Statistics, 349,861 visitors travelled to Seychelles in 2017, representing a growth of 15.4% between 2016 and 2017. Between 2007 and 2017, international arrivals to Seychelles grew at a compound annual growth rate (CAGR) of approximately 8.1%. As shown above, Seychelles demonstrated continuous growth over the years, with the exception of the global economic crisis in 2008 and 2014.Seychelles International AirportSince its opening in 1971, the Seychelles International Airport (SEZ) has been contributing to the healthy performance of the tourism sector with the arrival of new airlines and increasing flights of existing routes. As of January 2018, international airlines that service Seychelles include Air Austral, Air Seychelles, Condor, Emirates, Ethiopian Airlines, Etihad Airways, Kenya Airways, Qatar Airways, SriLankan Airlines. These flights connect Seychelles with international hub cities such as Bombay, Dubai, Istanbul, Johannesburg, and Paris. Seasonal flights are currently offered by Arkia, Austrian Airways, and Sun D'Or from Tel Aviv and Vienna.In 2018, Seychelles International Airport will expand their flight schedule. British Airways will begin to offer seasonal flights from London in March; Joon will begin to offer regular flights from Paris in May; and Edelweiss Air with seasonal flights from Zurich in September. With the upcoming additional flights, visitation to Seychelles is expected to increase.Major Feeder MarketsDespite the financial crisis in the Euro zone over the past few years, Europe still account for the lion's share of the Seychelles' tourism market (62%). This implies that the seasonal demand is pegged to European holiday periods. The key feeder markets are France, Germany, and Italy which account for more than half of the European market. France continued to be the largest feeder market, totalling 14% of total international arrivals in 2016, with a 15% increase of visitors compared to arrivals in 2015. In thesame year, arrival growths from Italy grew by 5% while Germany increased by 10%.To diversify from the mainstream inbound tourism markets, Seychelles has changed its tourism strategy to tap into new and emerging markets that have latent potential for growth, such as Asian markets like the Middle East, China, and India instead of focusing its marketing efforts on its primary and traditional tourist markets. United Arab Emirates (UAE) accounted for 8% of the total arrivals in 2016 while China and India recorded 5% and 4% respectively. Seychelles Tourism Board hopes to strengthen this market with flights from Abu Dhabi, Dubai, and Bombay.SeasonalityFrom data obtained from the National Bureau of Statistics and historical records, we have analysed the seasonality of visitor arrivals from the period 2007 to 2017. The peak season lies from October through April, coinciding with the best months for diving and fishing and holiday seasons. In particular, the period from February to April see a large increase in visitor arrivals because of the winter in Europe, as do the summer months of July and August. The low season falls from May to June, even though this time of the year is characterised by drier weather and cooling breezes.Purpose of VisitAs expected, the majority of the visitors travel to Seychelles for holiday purpose. In 2016, leisuretravellers accounted for approximately 94% of the total arrivals. Business segment represented about 3% of the total arrivals. 2% of the arrivals travel to Seychelles for other purposes such as crew and transit. Following figure provides a breakdown of overnight visitor arrivals by purpose of visit.Hotel MarketIn 2007, Seychelles market recorded 2,710 rooms available. As the destination slowly gained interest from both guests and investors, Seychelles doubled its supply to over 5,700 rooms in 2017. In 2014, the market recorded a 42.6% supply increase due to hotel openings such as the AVANI Seychelles Barbaron Resort & Spa, Eden Bleu Hotel, and Savoy Seychelles Resort & Spa. Aside from the resorts openings, there was also a noticeable increase in guesthouses and hostels around the two major islands, Mahe and Praslin. Since the supply boom over 2014 and 2015, the supply maintained a modest growth rate of around 5% in 2016 and 2017.In terms of occupancy, the Seychelles market has registered a relatively stable performance over the years. Albeit the strong supply growth, occupancy level generally recorded around 60%. In 2014, occupancy level slightly weakened due to the new supply. However, demand grew in par with supply in the following year, resulting in a 62% marketwide occupancy in 2015. With the rise of visitation to Seychelles in 2017, we estimated an occupancy level of 64% for 2017, indicating a 5% increase in roomnights sold.Marketwide OccupancyThe below figure illustrates the monthly marketwide occupancy for the past eight years. The monthly occupancy breakdown for Seychelles hotel market generally follows the visitational seasonal trend. February is the highest occupancy month, as it is the most severe winter month in Europe. June is the slowest month as a result of the comparatively cooler weather in Seychelles.PRASLIN, SEYCHELLESOver the years, the average length of stay Seychelles has averaged around 10 days. From 2009 to 2016, the lowest monthly average length of stay record was 9.0 days in February 2014 and highest was 11.8days in August 2010. Although some guests prefer to stay in more than one resort during their trip, they typically remain in Seychelles for more than a week for a complete island getaway experience.ConclusionOver the years, Seychelles maintained as a well-recognized island for European markets such as the French, German, and Italian. Despite the mediocre performance of the direct flights from Beijing, Seychelles Tourism Board continued to promote in China and the Middle East as emerging markets for Seychelles. With other holiday hotspots are impacted by natural disasters, political turmoil, and terrorist attacks, Seychelles proves to be a fairly safe country for travellers from around the globe. All in all, Seychelles tourism is expected to sustain a positive progression in the future years.

HVS Market Pulse: Geneva - Ripe for Budget?

HVS ·23 February 2018
This market pulse provides an overview of the tourism and hotel market in Geneva, Switzerland. It discusses recent tourism trends, challenges encountered in light of the currency situation and the impacts on hotel performance. This article also provides a summary of the extensive hotel pipeline which has the potential to make the city a more affordable destination to visit.

Market Pulse: Palm Springs & Desert Cities

HVS ·19 February 2018
Business and IndustryTourism has been the cornerstone of the local economy for some time; however, this sector has realized notable growth during the last several years, as a younger generation is discovering the city and new destinations, such as the Hard Rock Hotel, Hacienda Beach Club, and the Ace Hotel & Swim Club, appeal to this demographic. The popularity of special events and festivals, such as the Coachella Valley Music & Arts Festival, is intensifying, which bodes well for the local economy. The Greater Palm Springs Convention & Visitors Bureau reported that tourism in the Coachella Valley has an annual impact of over $6 billion and is responsible for one in every four jobs. Moreover, new stores, restaurants, and other commercial developments have been developed after a period of little to no growth. Chic hotel projects such as Kimpton's The Rowan, ARRIVE Palm Springs, The V Palm Springs, and Marriott's Autograph Collection Hotel PASEO have recently opened, while others such as the Hyatt Andaz and the Virgin Hotel have resumed construction. Residential construction has also regained traction in recent years, with several projects currently active throughout the Coachella Valley. The Valley is also an important site for renewable energy, with major wind-farm installations located in the San Gorgonio Wind Park just north of Palm Springs. Activity related to the maintenance, development, and harvesting of energy from the over 2,700 windmills is a major economic contributor.TourismTourism in the Coachella Valley is strongest from January to May, when the area enjoys cooler desert temperatures but a warmer climate than most other cities; the weather is especially welcoming to those visiting from the northern regions. The area's popularity as a resort, golf, and tennis destination makes tourism a critical component of this market's economy. The Coachella Valley is well known for several signature events, including Coachella Valley Music & Arts Festival, Stagecoach Country Music Festival, Indian Wells Masters/BNP Paribas Open, Modernism Week, the Palm Springs International Film Festival, April's LGPA Kraft Nabisco Championship, and the White Party. The BNP Paribas Open tennis championship draws over 400,000 visitors to the Valley in March at the Indian Wells Tennis Garden, while The Coachella Valley Music & Arts Festival and Stagecoach Country Music Festival combined attract upwards of 245,000 visitors to the Valley every year in April. Downtown Palm Springs is a popular tourist destination for shopping, dining, and entertainment, as the the area is replete with a wide variety of dining options and eclectic boutiques. The Palm Springs Art Museum is another popular downtown venue, which features an impressive collection of Marc Chagall, Pablo Picasso, and Andy Warhol pieces, among others, and a 430-seat theater. Downtown also features the significant Spa Resort Casino, which offers an expansive gaming floor and special entertainment events, as well. The Palm Springs Aerial Tramway is the world's largest rotating tramcar. The tram offers a ten-minute ride into the cliffs of Chino Canyon and is a popular attraction for visitors who may be camping in the summer or cross-country skiing in the winter. About 20 miles northwest of Palm Springs are the popular Desert Hills Premium Outlets, featuring over 170 stores. El Paseo is another popular shopping destination, located roughly ten miles southeast of Palm Springs in the city of Palm Desert. The Coachella Valley features approximately 125 golf courses and clubs, thus earning it the title "Golf Capital of the World." Notable changes related to the area's golf courses include the planned construction of a 140-luxury hotel and spa, as well as a four-star, 200-room lifestyle hotel at the SilverRock Resort in La Quinta; both hotels will be affiliated with Montage Hotels & Resorts. Swimming, tennis, horseback riding, and hiking in the nearby desert and mountain areas are also popular forms of outdoor recreation in the area. The Little San Bernardino Mountains, the Colorado Desert, and the Mojave Desert are the three unique ecosystems that make up Joshua Tree National Park. This 800,000-acre park offers unprecedented displays of desert wildlife, plants, and rugged terrains.Hotel Market SegmentationThe Coachella Valley is primarily dependent on FIT-related leisure demand. Leisure demand constitutes approximately 65% of the overall accommodated demand in the Valley. The balance comprises demand from the commercial (15%) and group (20%) segments.Hotel Market PerformanceThe Coachella Valley is undoubtedly operating with the highest occupancy and average rate (ADR) levels experienced in the last decade. With the market's recent increases in supply, further occupancy growth will likely be muted, as the new supply serves to moderate the market's strong demand growth. ADR growth should continue to increase in the near term as seasonality factors will limit further occupancy growth, forcing hotels to maximize revenue through an increase in average rates. The recent openings of new high-quality hotels, particularly those branded with luxury affiliations, as noted above, should also serve to increase the market's rate positioning and cachet with well-heeled travellers, and to attract demand to the market that would not have otherwise visited were it not for the availability of the new properties.Proposed SupplyThe Coachella Valley hotel market, offers approximately 140 hotels with 15,000 hotel rooms. The Coachella Valley, and specifically, Palm Springs, is undergoing a renaissance in its hotel sector. Below is a selection of publicly announced projects that have recently opened, are under construction, or proposed for the market.444As of year-end 2017, approximately 784 new hotel rooms had opened in the market, representing a 5% increase in supply. An additional 801 rooms remain under construction, with planned hotel openings in 2018 and 2019. A larger number of projects remain proposed, totaling 791 rooms. Assuming all proposed projects open by 2020, this would represent an additional increase in supply of approximately 10% over three years. Considering the market has experienced an increase in demand of nearly 50% since the last recession of 2009, it is safe to assume that any future supply increases will have minimal impact on the market's performance.OutlookThe outlook for the Coachella Valley remains positive. The Convention & Visitors Bureau published a goal to increase tourism visitation to the Valley from 12.8 million visitors to 16.8 million by 2026, representing a 30% increase over the next eight years. With this market's rapidly growing popularity as a tourism destination, replete with attractions, events, and a steady increase in demand, at the current pace, the market will certainly meet this goal in the next eight years, justifying the current renaissance in the market's hotel sector and necessitating the planned expansion or new supply proposed for the market. Our relationships and frequent interactions with major lending institutions across the nation reveal a growing apetite from the lending sector to finance high-quality assets in this market given the strong market fundamentals, as shared in this article, further incentivizing those development teams with an interest in the Coachella Valley.

HVS Hotel Bulletin Q4 2017 | By Russell Kett

HVS · 8 February 2018
AlixPartners, AM:PM and HVS have published the Q3 2017 Hotel Bulletin. The Hotel Bulletin analyses demand, supply, pipeline and transactions in the hotel market in 12 UK cities. Includes a focus on UK performance over the last five years.

Supply-Induced Hotel Demand in Portland, Maine: A Case Study | By Erich Baum

HVS · 7 February 2018
Downtown Portland Lodging Market TrendsThe following table details key rooms-revenue metrics for Downtown Portland between 2013 and 2016. As of 2007, Downtown Portland contained four good-quality hotels with roughly 550 rooms. A fifth hotel of approximately 200 rooms operated on the margins in a state of disrepair. Occupancy and average rate (ADR) levels were healthy and stable, but short of eye-popping. Then, beginning in 2009, affiliates of Residence Inn by Marriott, Hampton by Hilton, Courtyard by Marriott, Hyatt Place, and Marriott's Autograph Collection opened successively, and the derelict hotel noted above was closed, rehabilitated, and expanded into a 289-room Westin. Supply grew at an average annual rate of 9.1% between 2009 and 2016, with most of the growth realized in 2014 and 2015 (as noted above). The rapid expansion might have turned out as another example of the hotel industry getting ahead of itself; another instance of aggressive development and profligate lending. But something else happened instead. By 2016, the results were in, and they were unequivocally positive. In that year, the first full calendar year of operation after the last of the new hotel openings, Downtown Portland reached new ADR heights and near-peak occupancy levels.A Working Waterfront and Cobblestone StreetsDowntown Portland is peninsular, with three coasts. The Downtown district is surprisingly hilly; plows and salt keep it navigable in winter. The centerpiece is the Old Port, a multi-block historic district of cobblestone streets and an exploding restaurant scene. The architecture and streetscapes provide a distinctive sense of place, and the waterfront, with its rickety wharfs and piers, remains a working port. Despite the many charms of the Downtown core, Greater Portland can also be relegated to third-tier-city status: one characterized by a stable, slow economic growth rate. The Downtown district contains a small and static inventory of office space. Most of the region's major employers are based in the suburbs or nearby towns with their own character, like Freeport, home of L.L. Bean. With no convention center, the city's only large-scale gathering space is a civic center that opened in 1970s. ZZ Top was the first headliner. The arena is best known as the home of minor league hockey's Portland Pirates. Often, when the opening of new hotel inventory coincides with material demand growth, the group segment does the heavy lifting. New hotels with significant meeting space have a means of self-generating occupancy. Among the new hotels in Downtown Portland, however, only the Westin has a significant allotment of meeting space. Construction of the other hotels was based on faith in surplus transient demand, suggested mainly by the strong performance of the existing Hilton Garden Inn affiliate, the lone downtown hotel with an esteemed brand. The Old Port's emergence as a dining destination served as a positive indicator, as well. But against the burden of filling roughly 1,000 new rooms, the evidence looks scant. And yet the new, almost 350,000 room nights of annual capacity were filled at a rate of 77% in 2016, stronger than the pre-recession occupancy rate. Pricing also surged. The new hotels thrived by accommodating excess demand (previously turned away due to lack of capacity) and by stimulating new demand through the advertising and promotional efforts of the hotel staff and their brands' marketing and frequent-guest programs. In the case of the new Marriott Autograph Collection and Westin affiliates, the quality and scope of the facilities also played a role in reaching new markets. Combined, these dynamics encompass the phenomenon of supply-induced demand.Supply-Induced Demand, ClarifiedFor the most part, when demand is "induced" by new supply, occupancy that was historically accommodated elsewhere is captured by the expanded market in question. Before the rapid expansion of Downtown Portland's hotel inventory, leisure travelers who were a) unable to stay in Downtown Portland because of insufficient capacity but, b) sought a Portland-like experience, had numerous comparable options. They chose Freeport, Maine; or Portsmouth, New Hampshire; or Providence, Rhode Island; or Boston, Massachusetts. And where travelers with business to transact in Portland were concerned, those who now stay Downtown mostly stayed in South Portland, in one of the many hotels near the Maine Mall. Induced demand is largely demand that is re-routed to a location/product that is either more preferred, or was preferred in the first place but unavailable. Hotel demand in the broadest sense is born in economic activity, which creates both the need for travel (for commercial purposes) and the disposable income necessary to support the human want for travel (for leisure purposes). In this broad context, hotel demand grows proportionate to economic growth. Looking at the lodging industry on a national basis is instructive in this regard. The following table summarizes key rooms-revenue metrics for the U.S. lodging industry between 2013 and 2016. Comparing the national supply and demand change rates with those of Downtown Portland, far less volatility is in evidence, which is reasonable considering the national survey encompassed approximately 4.5 million hotel rooms, compared to roughly 750 rooms in Downtown Portland. A larger sample smooths out the bumps of volatility. The national statistics, because of their scale, also serve as the best measure of base economic change. Between 2013 and 2016, the national lodging market's demand grew at an average annual rate of 2.9%, basically in line with underlying national economic growth over that period.By comparison, Downtown Portland's demand grew at an average annual rate of 14.6% over the same period. Seen as a microscopically small share of the national lodging market, Downtown Portland's above-national-market rate of gain is balanced by below-national-market results in some other market or markets. Supply-induced demand is largely a measure of one or several new hotels' ability to consume some other hotel market's lunch.Predicting SuccessSupply-induced demand is common. For any market that experiences at least one sellout night per year, a new hotel--even a charmless rooms-only hotel--will technically induce demand when it accommodates a single stay that was previously turned away. Predicting how much demand can be induced is the challenge. Meeting space helps, but new-build full-service hotels in anything but the most urban of locations are increasingly rare. Otherwise, prospects are generally tied to questions of high-season market depth; the likely emergence of new demand generators in the market; or the exceptional features, facilities, or branding of the new hotel(s) in question. Analysts can also cite comparable market data, such as the experience in Downtown Portland, which, in hindsight, was ripe for expansion. Growing wealth in travel-hungry feeder markets throughout the Northeast, and these travelers' preference for coastal urban settings with a vibrant dining and nightlife scene, have proven to be major catalysts. The city is renewed and ascendant, and is being appreciated by new generations for its indelible charms and authenticity. Investors in Portland's new hotels have largely been rewarded for their vision and confidence in the market's potential, and doubters have been edified.

Market Pulse: San Diego, CA | By Patrick S. Bursey & Aaron Solaimani

HVS · 7 February 2018
Downtown San DiegoDowntown San Diego is considered the heart of San Diego County, and given its excellent accessibility attributes, there are a variety of options for travel in and around the city. Three of the county's nine major freeways flow through the city, Downtown is located only two miles southeast of the airport, and there are several ridesharing and public transportation options that can easily connect tourists to the area's primary sources of lodging demand.San Diego benefits from a diverse mix of demand generated by local corporations, government entities, meeting and group business, and leisure-related activity. Compression resulting from large conventions held at the San Diego Convention Center produces a significant number of room nights in the market on an annual basis. Furthermore, the Little Italy and the Gaslamp Quarter neighborhoods are home to an array of restaurants, bars, nightclubs, and other tourist-oriented businesses that attract leisure guests and serve as amenities to convention attendees. Popular leisure attractions throughout the area continue to attract strong fly-in and drive-in demand. The local economy continues to expand, with tech start-ups, residential development, increases in military spending, and record high levels of visitation. One of the most up-and-coming areas of the city is its East Village neighborhood. The downtown San Diego area can be divided into eight neighborhoods: Columbia, Core, Cortez Hill, East Village, Gaslamp Quarter, Horton Plaza, Little Italy, and the Marina District. Each neighborhood contains a unique mix of cultural and distinct demand generators, which, to some extent, may preclude the hotels from competing for the same business. Downtown San Diego's primary economic districts are the Core (office space), Horton Plaza (shopping), Gaslamp Quarter (restaurants and entertainment), and Marina (waterfront and convention center). Many residential, retail, office, and other commercial developments are occurring in the market. Most of the high-rise buildings that have recently been completed or are currently under construction represent high-end condominiums and hotels. Most of these projects are on sites near the waterfront or in East Village, consistent with the overall civic redevelopment plans for San Diego. We have outlined a few of these projects below.* Pacific Gate: Vancouver, B.C.-based Bosa Development Corp is currently amid developing a new condominium building called Pacific Gate; the 41-story property will contain 215 residences, 16,000 square feet of retail space, and 460 parking stalls within three below-grade levels. Bosa has played a major role in creating many of San Diego's upscale, high-rise residences and landmarks; other completed Bosa developments in Downtown San Diego include Horizons, Park Place, Discovery, The Grande, and Electra.* Manchester Gateway: This project is being developed by Manchester Financial Group, a prominent San-Diego based development firm. The complex will occupy a three-million-square-foot site to be improved with a mixed-use development including the following components: a four-star hotel and four-and-a-half-star hotel, totaling 1,360 guestrooms; more than 1.2 million square feet of office space among three Class-A office buildings, one of which is being built solely for use by the U.S. Navy; a 391,000-square-foot retail development; and a public waterfront park. The site represents one of the largest, if not the largest, undeveloped urban waterfront sites located along the California coast, located in San Diego's Central Business District and within walking distance of the convention center. Given the large size and scope of this project, as well as its location on the San Diego waterfront, this development represents one of the most prominent and unique development opportunities on the West Coast.* Seaport Village: Seaport Village is a waterfront retail and dining complex that opened in 1980 on the site of the San Diego-Coronado ferry landing. Operated by Terramar Retail Centers, Seaport Village represents yet another tremendous waterfront redevelopment opportunity. Various developers have expressed interest in the site; the most recent proposal is a $1.2-billion project that includes three hotels; retail and restaurants; a 480-foot observation tower; a partially underground aquarium; 30 acres of new parkland, beach, and promenades; and upgraded facilities for commercial fishing fleets and pleasure craft on more than 70 acres.* Ballpark Village: A 37-story apartment tower and retail development is under construction on a site located directly east of the Petco Park baseball stadium. With an anticipated opening date slated for the third quarter of 2018, the $250-million project is anticipated to include 439 luxury apartments, 274 low-rise residential units, 45,000 square feet of retail and restaurant space, a 12,000-square-foot open-air plaza, an above-grade walkway, and over 900 parking spaces. The developer is also proposing a 1,600-room hotel; however, the hotel component is contingent upon a convention center expansion. The developer noted that the projects could represent more than $1.5 billion of additional construction activity in Downtown San Diego.* UCSD Extension Project: UC San Diego and Holland Partner Group recently broke ground on a $275-million, 34-story apartment building and a UC San Diego cultural and education hub, which is expected to feature 426 apartments, a 53,000-square-foot office and classroom building, a historic restaurant facility, and a 3,200-square-foot outdoor amphitheater. Officials anticipate the project to be completed in 2021.The following table illustrates new and proposed hotel supply in Downtown San Diego.[1]A summary of a few of these projects has been provided below. The Lane Field South site is currently under construction with a 400-room InterContinental Hotel, set to open in early 2019. The project is part of an ongoing effort to redevelop the waterfront; the recently developed dual-brand Residence Inn/SpringHill Suites by Marriott hotel is located on the site adjacent to the north, while the proposed Manchester Gateway development is across Broadway to the south. A $270-million project, set to include an 831-room convention headquarters hotel and a 160-room boutique or "shared accommodations" lower-cost hotel, is proposed for development on the Fifth Avenue Landing site. Of important note, this is the same site that would house the contiguous expansion of the convention center, if approved. The project came about because of the City of San Diego's default on purchasing the premise for the Convention Center Expansion and the corresponding lease obligations of Fifth Avenue Landing (FAL). A 500-room expansion to the existing Hilton Bayfront has been proposed by its owner, Sunstone Hotel Investors. The added rooms would be located adjacent to the existing building and would include a 34,500-square-foot ballroom, 12,000 square feet of meeting rooms (92 square feet of meeting space per room in total), and a 7,500-square-foot fitness center and spa. The project is estimated to cost $200 million and is currently being planned and entitled with the expansion of the convention center.TourismTourism is an important factor for San Diego area hotels. San Diego's numerous beaches and beach towns, including Mission Beach, Pacific Beach, Ocean Beach, and La Jolla, attract large numbers of visitors annually. Aside from the sun-soaked beaches, three major attractions bring families to the greater San Diego market. SeaWorld is a marine animal theme park featuring animal shows and a variety of rides. In September 2016, SeaWorld officials announced the investment of $175 million on new attractions at SeaWorld Florida and SeaWorld San Diego, which are anticipated to open in 2018; a new documentary-style orca encounter is planned for SeaWorld San Diego. LEGOLAND is a theme park that focuses on Lego bricks, a popular children's toy. Balboa Park is a 1,200-acre, urban, horticultural and cultural resource park containing vast open spaces, natural vegetation zones and green belts, gardens, and walking paths. It contains 15,000 trees and 14 specialty gardens; nearly 100 arts, education, recreational, social, and sports organizations; 17 museums and cultural institutions; the San Diego Zoo; and Old Globe Theatre. There are also many other recreational facilities, including a golf course and several gift shops and restaurants, within the boundaries of the park. It entertains more than 10 million visitors per year. Although present year-round, the peak season for tourism in this area is from May to September. Leisure demand is typically strongest during key weekends and during the summer vacation season.Convention CenterThe San Diego Convention Center (SDCC) is the premier facility for conventions and trade shows in San Diego, hosting nationally and internationally renowned events such as San Diego Comic-Con International, the American College of Cardiology Scientific Session, the National Safety Council Expo, Cisco Live, and the Esri User Conference. Operated by the San Diego Convention Center Corporation, the venue attracts national and international associations and corporate events. The SDCC opened in 1989 and underwent an expansion that roughly doubled its size in 2001. The facility spans 2.6 million square feet, including 615,701 square feet of total exhibit space, 284,494 square feet of lobby and pre-function space, 204,114 square feet of meeting space, and 184,514 square feet of outdoor space. The remainder of the space comprises hallways, kitchens, executive offices, and other back-of-the-house facilities, as well as parking. During fiscal 2017, the SDCC achieved a 76% occupancy and generated a $1.1-billion regional economic impact, with nearly 844,382 estimated hotel room nights.[2] Given the significant amount of meeting and group demand in the market, proposals to expand the center have been brought forth; however, the last two expansion attempts have not received enough support from the citizens of San Diego to secure the appropriate amount of funding. Continued efforts to expand the center are expected; If the expansion is passed in the November 2018 election, it could be completed by 2021, at the earliest.AirportSan Diego International Airport (SAN) is the busiest single-runway airport in the United States and occupies the smallest land footprint of any commercial airport in the country (661 acres). With no plans for future runway expansion, current airport forecasts suggest that arrivals and departures at the airport will increase to 260,000 annually between 2018 and 2022. August 2013 marked the completion of the $900-million "Green Build" expansion project of Terminal 2, which was completed $45 million under budget. The project, which was the largest in the airport's history, included ten new jet gates; additional shopping and dining options; expanded concessions; enhanced curbside check-in capacity; a new security checkpoint; a new, 25,000-square-foot check-in lobby with 32 airline counters and ten self-service kiosks; and a dual-level roadway to separate arriving and departing passengers. In April 2014, the airport became the first in the world to achieve LEED Platinum certification. The next part of the airport's Master Plan phase includes determining what improvements are necessary for the airport to accommodate demand through the year 2035. The primary project for consideration at this time is the demolition of Terminal 1 and construction of a new, 1,500,000-square-foot, 30-aircraft-gate facility that is anticipated to extend up to 150 feet above the ground. Airport officials have indicated that the project could open as early as 2020.It is important to note that several additional flight routes were added to San Diego International Airport in the recent past. In May 2017, new seasonal service between San Diego and Frankfurt, Germany, commenced. The new flight is operated by one of Germany's most popular leisure airlines, Condor (DE), and is one of only three nonstop connections between San Diego and Continental Europe. With up to three weekly flights on Mondays, Thursdays, and Saturdays, the route operates on a Boeing 767-300ER aircraft. City officials stated that Germany is one of San Diego's top partners for exports and foreign investments, and is rapidly becoming one of the economy's most important international markets. In June 2017, Edelweiss, an affiliate of Swiss International Airlines, launched a new nonstop route between Zurich and San Diego; the service runs seasonally through early November. San Diego marks Edelweiss' first nonstop destination in California; the flights will reportedly bring approximately 15,000 visitors to San Diego each year, creating an estimated economic impact of $50 million. In the spring of 2017, low-cost carrier Frontier Airlines announced nonstop service from Cleveland Hopkins International Airport to San Diego. Cleveland has not had a nonstop flight to San Diego since 2008. According to Cleveland Hopkins airport officials, San Diego was the largest unserved market from Cleveland, with just under 100 passengers a day traveling between Hopkins and San Diego International Airport; the new nonstop flight has significantly increased travel between the cities.Lodging MetricsHotel demand and occupancy has been steadily rising since 2010, resulting in peak occupancy levels over 79% in 2016,[3] nearly 4.5 points above the prior peak of 74.7% in 2007.[4] Average rates (ADR) began rebounding in 2011, following the recovery in occupied rooms, and have increased year-over-year since then. In 2014, market-wide ADR growth reached levels not experienced since the prior demand peak of 2007; this strong performance was driven by an increase in the number of attendees at key annual conventions, such as Comic-Con International, and healthy tourism levels. Year-to-date data for 2017 illustrate a slight increase in occupancy. Specifically, we note that the increases in demand have been diminished by increases in new supply. Alternatively, ADR has increased moderately, thus, resulting in a moderate RevPAR gain. Given the diversity and depth of the local economy combined with the anticipated moderate increases in new supply, the outlook for the San Diego lodging market remains favorable. AirbnbA growing trend in the lodging industry is the use of Airbnb, an online marketplace and hospitality service that enables people to list privately-owned real estate as alternative lodging options to traditional hotel rooms. Airbnb does not own any lodging facilities; it acts as a brokerage service and receives service fees from both guests and hosts on every booking. Airbnb supply in San Diego has been consistently increasing over the past two years. Due to the different kinds of Airbnb accommodations and fluctuations in nightly inventory, is difficult to conclude to the exact number of lodging facilities available on average each night, but Airbnb supply is becoming an increasingly large component of the San Diego lodging industry. Due to San Diego's large number of seasonal and absentee owners, the market is even more vulnerable to this trend. Airbnb provides additional supply during peak demand periods, which can be viewed as a positive impact, allowing more visitors to stay in the San Diego area when hotel supply is inadequate. In addition, a wide variety of units, including entire homes, are made available to the public, which increases the spectrum of lodging options. On the downside, when residential-unit owners put their units into the Airbnb rental program during peak compression periods, the pressure on existing hotels that allows them to charge peak rates is reduced. The profitability of hotels is positively affected by strong pricing during peak demand periods, and with more competitive supply available during times of compression, average rate and profit gains can be diluted. City officials are currently in the process of reaching an agreement on new rules that would limit the short-term rental of investor properties; negotiations are ongoing.ConclusionThis report discussed a wide variety of economic indicators for the pertinent market area. San Diego is experiencing a period economic strength and expansion. The federal government and related entities will remain cornerstones of the market, while the tourism, health sciences, wireless technology, and biomedical engineering sectors should continue to expand. Given the anticipated increases in government funding of the area's military installations, the ongoing expansion throughout Downtown, a strong convention calendar, and other positive corporate news, the outlook is optimistic.[1] San Diego Tourism Authority, San Diego County Potential New Supply Developments; updated December 2017.[2] San Diego Convention Center Corporation, Inc., Fiscal-Year 2017 Annual Report, FY 2017 Performance Summary.[3] San Diego Tourism Authority, San Diego Visitor Summary (Annual), Hotel Performance - Source: STR.[4] San Diego Tourism Authority, 2017 San Diego County Visitor Summary by Month through September 2017, Hotel Sector Actuals - Source: STR.
Article by Peter Szabo & Simon Hulten

HVS 2018 European Hotel Lending Survey

HVS · 5 February 2018
This study presents the current lending environment for hotels. It consists of four topics, (1) lending parameters, (2) availability of debt by project and chain-scale segment, (3) loan characteristics, and (4) an outlook on lending criteria.

HVS Announces New Spa & Wellness Partnership

HVS ·31 January 2018
HVS and spa-and-wellness consultancy Mackman ES have formed an alliance in the United States to fill the need for comprehensive, future-driven, spa-and-wellness valuation, feasibility, and strategic planning. "This alliance offers the hospitality industry advanced, one-of-a-kind client solutions in the rapidly evolving spa-and-wellness space, and HVS divisions worldwide can tap into this expertise as needed. This relationship also fosters an inclusive understanding of spa and wellness through industry insight with an emphasis on the significance of wellness in hospitality and its future value and growth," said HVS Americas' President, Rod Clough, MAI. The global wellness real estate market represents one of the fastest-growing wellness sectors, having risen 19% from $100 billion in 2013 to $118.6 billion in 2015. Wellness tourism continues to surge at a reported $563 billion, in addition to $99 billion in global spa business, according to the Global Wellness Institute; moreover, wellness real estate is expected to rise to from $134 billion in 2017 to $180 billion by 2022, contributing to a $3.72-trillion global wellness market. [1]HVS has appointed Mia A. Mackman as HVS Director of Spa & Wellness Consulting to lead the spa-and-wellness aspects of its consulting engagements that require in-depth spa-and-wellness expertise. "We are excited to back the expanding hospitality/spa-and-wellness landscape together, with a view on the future of hospitality, investments, and growth. The evolution we have seen in recent years makes this a well-timed advantage for HVS clients seeking to succeed in this unique and transforming space" said Mia Mackman, founder and principal of Mackman ES. Thousands of hotel owners, developers, investors, lenders, management companies, and public agencies around the world rely on HVS to support confident, informed business decisions. This alliance is a part of HVS's commitment to excellence and unrivaled hospitality intelligence, prepared to meet the demands of a changing market.Mackman ES is a future-driven, spa-and-wellness consultancy with over 23 years of industry experience and a global network of resources and associates dedicated to providing objective, intelligent, intuitive, and leading-edge spa-and-wellness expertise.[1] GWI:

Africa: The Land of Opportunity | By Sofie Otto & Tim P. Smith

HVS ·31 January 2018
2017 was full of triumphs and disappointments on the African continent. Some countries that had a positive outlook at the beginning, turned into the problem children of Africa and countries that seemed hopeless in the beginning, surprised us in the end. This article provides a brief summary of some of the most significant events of 2017 and commentary on how 2018 may evolve in the fast-developing world that is Africa. Trump's remarks have shown the need for Africans to independently take responsibility for their actions, resolve issues, help each other and above all, not rely on others who do not truly understand the continent. There were plenty of examples of just that last year:

Market Pulse: Downtown Los Angeles | By Greg Mendell & Jessica White

HVS ·25 January 2018
DTLA's population has boomed in that time, as well, increasing nearly 250% between 1999 and 2016 to 65,100. Aside from the 32 million square feet of office space, the number of residential units has more than tripled (from 11,626 in 1999 to 38,120 in 2016); an additional 11,460 units are under construction, and 26,907 more units are planned. Approximately $27.1 billion has been invested in DTLA since 1999, and over 800 new restaurants, bars/lounges, nightclubs, and retail establishments have opened in the past eight years.[1]Hotel InventoryDTLA currently has about 9,700 rooms of existing hotel inventory. Branded and independent full-service and boutique hotels dominate the market, such as the JW Marriott Los Angeles LA Live, The Standard Downtown LA, and the Millennium Biltmore. The most recent additions to the market include the Freehand Los Angeles, Hotel Indigo Los Angeles Downtown, and InterContinental Los Angeles Downtown, all of which opened in 2017.Newly OpenedFour new hotels have opened in DTLA within the last year. Maybe the most unique of these properties is the Tuck Hotel, which opened in the Fashion District. Unlike many of the properties proposed or operating in the downtown area, the Tuck Hotel is small, featuring only 14 guestrooms. The property, which opened in December 2016, offers three different room types ranging from 320 to 450 square feet, as well as a restaurant and bar. Owner Juan Pablo Torre wanted to create a different offering within the market, explaining that the name is an allusion to the "tuck shops" found in the United Kingdom, which are small retailers known for selling candy.The other three hotels that haven opened during this timeframe dwarf the Tuck Hotel in terms of room count. The Hotel Indigo, located in the L.A. LIVE/Convention Center submarket and part of the larger Metropolis development, initially had a soft opening in April 2017, before fully opening in June. Featuring a 1920's Prohibition-era design, the 18-story property includes a lobby-level restaurant, a top-floor cocktail lounge, a 9,100-square-foot outdoor pool terrace, a 24-hour fitness center, and 22,000 square feet of meeting space. The larger Metropolis development is expected to include an indoor/outdoor, 70,000-square-foot retail pavilion and three residential towers with resort-style amenities. The Freehand Los Angeles opened in June 2017 in the South Park submarket. Developed by the Sydell Group, this property offers 167 private rooms and 59 shared rooms. While the private rooms are more typical to your standard hotel room, featuring nubby textures and earthy, natural tones, the shared rooms closer resemble that of a hostel. However, these are not your typical hostel rooms; the shared rooms feature bunk beds made of solid wood, the same mattresses used in Sydell Group's luxury NoMad Hotels, and private in-suite bathrooms. Furthermore, the hotel's rooftop bar, known as "Broken Shaker," opened in July, offering an eclectic menu of handcrafted cocktails and small bites. The largest of Downtown's new openings is the 889-room InterContinental Los Angeles Downtown, located in the Financial District. Part of the $1.35-billion, 73-story Wilshire Grand tower, which is now the tallest building west of the Mississippi, the property occupies the 31st to 68th floors and includes 95,000 square feet of event space, as well as six food and beverage outlets; it is the largest InterContinental in the Americas. The property's rooftop bar, Spire 73, is the highest open-air bar in the Western Hemisphere.Meanwhile, the NoMad Hotel in the Financial District has been completed as well. The project involves the conversion of Giannini Place, the former Bank of Italy Building at 7th and Olive Streets, to a luxury property that contains 241 guestrooms, ground-floor retail and restaurant space, meeting rooms, a rooftop pool, and an event deck. Sydell Group, which also recently opened the Freehand Los Angeles, opened this property on January 21, 2018.Proposed Hotel DevelopmentsRecent hotel development has been astounding, with roughly 1,500 rooms currently under construction, and nearly another 5,000 in the development pipeline. DTLA's incoming supply represents a potential 80% increase to the existing inventory. Since the start of 2014, five properties containing almost 1,800 rooms have opened. The majority of hotel development is taking place within the L.A. LIVE/Convention Center area and the adjacent South Park district, which has been spurred by the expectation of an expansion to the Los Angeles Convention Center, as well as the City's 2013 goal of having 8,000 hotel rooms within three-quarters of a mile of the convention center by 2020. Some of the more notable proposed developments include the Park Hyatt Oceanwide Plaza, the NoMad Hotel, the 1300 Figueroa Development, the Fig + Pico Triple Hotel, and the W Downtown.The 1300 Figueroa Development is currently in the early stages of development; plans call for a 53-story skyscraper by developer TriCal Construction, which would be located across Figueroa Street from the convention center's South Hall. Along with a ground-floor restaurant, a rooftop bar, and meeting and banquet space, the property would contain 1,024 hotel rooms operated by two different hotels, similar to the nearby JW Marriott and Ritz-Carlton. According to TriCal, it may take two to three years to receive City approval for the project, and an additional two years to develop the property.Nearby, another megaproject is taking place, commonly referred to as Oceanwide Plaza. Along with an open-air, 166,000-square-foot retail area and 504 condominiums, a 184-key Park Hyatt is expected to be developed; the property would become the sixth location in the U.S. for the luxury brand. Located at Flower and 11th Streets, this project is anticipated to be completed in 2019.Of all these projects, the Fig + Pico project will be the most significant in size. Still in the early development process, developer Lightstone Group plans to construct two buildings of 42 and 25 stories. The larger tower, to be located at the corner of Figueroa and Pico Boulevard, would contain 820 guestrooms split between two operators, as well as 11,000 square feet of commercial uses, rooftop pool decks, meeting space, and parking; the smaller tower, which would be located at the corner of Pico Boulevard and Flower Street, would contain 342 guestrooms, 2,145 square feet of ground-floor commercial space, and similar ancillary features. No operators or hotel brands have been announced for this project, and a timeline has not been confirmed; however, completion is reportedly aimed for 2022. Additionally, it was recently reported that the project has a $67.4-million feasibility gap in financing. The developers and the City are working on a deal that would provide $103 million in public money for the project, although this is considered speculative at this time. Similarly, the L.A. City Center Project, which would contain a 300-room W Hotel, was recently approved after the developers submitted new plans for the $700-million development. This project has been rumored for years, with plans changing several times. The most recently approved plans feature two buildings; the 29-story structure would contain the hotel, while an adjacent 49-story building would house 435 condominiums. Additionally, the project would contain approximately 5,000 square feet of retail at the ground level. A final timeline for this project has not been approved. These projects, as well as the remaining projects under construction and in the pipeline for Downtown Los Angeles, are listed and mapped out below. It is important to note that some of the projects, particularly those that are speculative, may never come to fruition, as many of them are still seeking financing or final approval from the City, which is often a lengthy process.Convention CenterThe Los Angeles Convention Center (LACC) is a significant demand generator for DTLA and is one of the key contributors to the economic and cultural vitality of Los Angeles. In recent years, the convention center has hosted several high-profile events, including events related to the Special Olympics in 2015. In addition, in April 2014, it was announced that the LACC was able to attract the U.S. Green Building Council conference away from the San Diego Convention Center, a major competitor of the LACC. This new conference, which was held in October 2016, attracted over 18,000 attendees.Historically, the LACC has lost larger citywide conventions to other regional convention centers with more guestrooms within a walkable distance. This trend is set to change with the number of new DTLA hotel rooms coming online within a one- to two-mile radius, including the recently opened almost 900-room InterContinental Los Angeles Downtown. In June 2015, the City Council approved the recommendation to move forward into contract negotiations with HMC Architects and Populous for the expansion of the LACC. However, this project is currently on hold, as AEG, which owns the Staples Center and L.A. LIVE and operates the LACC, may potentially take on the expansion project. Under this plan, AEG would likely develop a hotel, office space, a retail component, and more. According to convention center officials, the expansion plan would make the LACC more attractive for larger conventions, such as Comic-Con International, which has historically been held in San Diego. By size, the current facilities place the LACC near the bottom of major convention centers in the U.S.; however, with the proposed expansion, it would rise to the mid-range, just above Anaheim Convention Center's current offering of space.Hotel Market PerformanceHistorically, the DTLA market has been driven by corporate and meeting/group demand, but leisure demand is expanding, with L.A. LIVE as the main catalyst, coupled with the openings of restaurants and nightlife venues. Local hoteliers report that the area has become a hub for tourists, with travelers opting to stay Downtown while exploring other parts of the greater Los Angeles market. The success of L.A. LIVE and the JW Marriott and Ritz-Carlton hotels has benefitted market-wide average rate (ADR) in DTLA. These hotels set a new bar given their luxury product offerings and brand affiliations at higher price points, helping to raise the market-wide average rate and spur renovation projects at other hotels. DTLA has registered seven consecutive years of RevPAR increases. According to HVS surveys with market participants, our research, and interviews with DTLA hotel managers, in 2016, occupancy registered in the high 70s, with an ADR level averaging $220, and a RevPAR of approximately $175, an increase from the year prior and an all-time high. A minimal occupancy decline was registered in the year-to-date period through October 2017 because of the entrance of new hotel supply, particularly the InterContinental Los Angeles Downtown, although ADR reportedly increased 2% to 3% year-to-date. While illustrating an improvement for this market, these average rates still have room for growth before catching up with the average rates commanded by greater Los Angeles' top-tier markets, such as Santa Monica, West Hollywood, and Beverly Hills.Lodging TransactionsInvestor appetite in DTLA has strengthened in recent years. Since 2014, over $500 million in assets have traded hands, representing nearly 23% of DTLA's total supply.The DoubleTree by Hilton Los Angeles Downtown was purchased by the Chinese firm Han's Group USA for $115 million in June 2017, more than double the hotel's 2011 sales price. The ability to purchase existing, high-quality hotels with a proven track record in the burgeoning DTLA market is still an attractive option for investors, even with new supply on the horizon.Slightly over a year after the Ace Hotel opened, it sold to public REIT Chesapeake Lodging Trust for $102 million, or $558,791 per key. The Ace represents the highest price-per-key transaction for investment purposes (non-redevelopment) to ever to take place in DTLA, illustrating that investors have confidence in the market's continued growth; the previous record was held by the Standard Hotel Downtown, which sold for $444,444 per key in 2008. Greenfield Partners paid $11 million for the historic United Artist building in 2011, which was subsequently converted to the Ace Hotel. The cost of the renovation was not disclosed. Chesapeake also owns the Hilton Checkers in DTLA.After being converted from a Holiday Inn to the Luxe City Center Hotel in 2010, the hotel sold to Shenzhen Hazens Real Estate Group in July 2014 for redevelopment purposes. Although the sales price penciled out to $585,112 per room, the price included multiple adjacent parking lot parcels and, thus, was not a true per-key price figure. In September 2017, the City approved plans for a 300-room W Hotel Los Angeles on the site as part of the greater $700-million L.A. City Center project, which will include 435 condominiums, retail space, and subterranean parking.ConclusionThe influx of people and development in Downtown Los Angeles has led to a notable increase in the supply pipeline, and the scope of the major mixed-use projects is expected to advance this phase of DTLA's renaissance. With the saturation of full-service and boutique hotels in DTLA, there may be opportunities to develop other hotel products, particularly those affiliated with nationally recognized hotel chains; no nationally recognized, branded, limited-service hotels currently exist in DTLA, atypical of downtown markets in other major U.S. cities. With the availability of developable land decreasing rapidly, adaptive reuse projects remain a viable option for the development of limited-service, select-service, and/or extended-stay hotels in the DTLA market.[1]

Impact of Countervailing Forces on Hotel Values and Cap Rates | By Suzanne R. Mellen

HVS ·25 January 2018
It's hard to ignore the changes afoot in the U.S. political and economic landscape. While the impact of deregulation, anti-immigration activity, and the Tax Cut and Job Creation Act of 2017 (TCJA) have yet to be felt or measured, the lodging industry is operating on a platform of shifting sands. Slowing RevPAR and NOI growth, coupled with rising interest rates, further cloud the outlook. Only time will tell how our industry will fare, but the pros and cons can be weighed in the interim to assess the potential impact on hotel cap rates and values.Hotel sales transaction activity provides a gauge for assessing asset value and cap-rate trends. While total 2017 U.S. hotel sales volume (based on preliminary data reported by Real Capital Analytics) reached $27 billion,[1] a decline of 25.0% from the $36 billion level reached in 2016, individual sales transactions, which accounted for 82.0% or $22.2 billion of the total volume, declined by only 2.3%. Approximately $8 billion of the decline in transaction sales volume was due to significant declines in portfolio and entity transactions,[2] which in turn were dominated by Chinese investment in 2016. Portfolio and entity volume declined by 25.0% and 87.0%, respectively. Cross-border transaction activity, as tracked by RCA, declined by 69.0%, from $11.6 billion to $3.6 billion; almost the entire $8-billion decline in offshore activity can be attributed to a pullback by Chinese investors.The average price per key (PPK) derived from the total sales volume increased by 3% in 2017, from $134,000 to $138,000. Major hotel sales volume, defined as those that sold for a price of $10 million and over, declined by 29%, and the average PPK held steady at $222,000 per room. Sales volume of assets priced at $10 million and under remained stable, as did the average PPK. The lower average PPK should not be viewed as a decline in hotel values, as this metric is affected by the composition of assets sold. Fewer large, high-priced hotels in coastal metro areas sold in 2016 and 2017, thus affecting the PPK; secondary markets with more potential for upside were favored by investsors. In summary, the hotel transaction market was active and steady in 2017, despite the concerns and pullout of some investors.2017 Hotel Sales Transactions $2.5+ and $10.0 + MillionAs evidenced by the following data, individual hotel sales volume reached a consistent level of $22-23 billion in 2014, 2016, and 2017. The heady $29.6 billion individual sales volume in 2015 was driven by a number of large, high-priced individual transactions in major metro areas. Overall, the hotel transaction market has remained active and balanced, reflecting the continued appeal of hotel assets for yield-driven investors.2017 Hotel Sales Volume: Individual Asset, Portfolio, and EntityWhile individual asset transaction volume has remained steady, capitalization rates continued their modest year-over-year rise because of lower future RevPAR and NOI (net operating income) growth exceptions. According to HVS data derived from hotels appraised at the time of sale, overall capitalization rates based on historical NOI rose over the course of 2017, averaging 7.5% for full-service hotels based on historical NOI. Note that these are averages and rates of return can vary significantly for individual assets.Full-Service Capitalization and Discount Rates Derived from Sales TransactionsThis same data are reflected in the following graph. Cap rates continued their modest climb through 2017, while discount rates flattened given the slowing of NOI growth.Full-Service Capitalization and Discount Rates Derived from Sales TransactionsCap-rate data based on historical NOI, captured by HVS for full-service, select-service/extended-stay, and limited-service hotels over the past five years, are presented below. Select-service and extended-stay hotels reflect the branded, upscale STR chain scale, while limited-service hotels reflect the midscale and economy chain scales. Cap rates for full-service hotels rose 30 basis points (bps), while select-service/extended-stay rates increased 10 bps. Limited-service hotel cap rates remained stable.Comparative Average Cap Rates Derived from Sales Based on Historical NOIWe caution that the derived capitalization rate data are dependent upon the individual sales transactions that comprise the data. The wide range in cap rates that comprise the HVS data averages is evidenced in the chart below. Individual sales transactions can affect the cap-rate range and average.Capitalization Rates Derived from Sales Transactions - Historical NOIThe following chart, which sets forth capitalization rates and internal rate of returns (IRRs) by product segment for 2016, reflects the step-up in rates of return from the full-service to select-service/extended-stay and limited-service sectors. "Going-in" capitalization rates, derived from projected first-year NOI divided by the purchase price, range from 20 to 90 bps above cap rates derived based on historical NOI, reflecting the expectation of future increases in NOI by investors.Average Rates of Return Derived from 2017 Sales Transactions[3]As we assess the outlook for hotel values and cap rates, key factors that will affect the hotel investment landscape over the near and mid-term include the following:1) The Tax Cut and Jobs Act (TCJA) of 2017, as commercial property owners are some of the biggest beneficiaries of the new lawThe 1031 Exchange provision remains in place.Commercial property owners will still be able to fully deduct mortgage interest expense, while also benefitting from the reduced 21.0% corporate tax rate.Pass-through entities, like LLCs and partnerships, commonly used to own commercial real estate, will benefit from lower tax rates; they will be taxed at their personal tax rate, less 20.0% for expenses.The TCJA allows full and immediate expensing of short-lived capital investments for five years.The net effect of this favorable tax treatment is likely renewed interest in commercial real estate ownership and development. Strong demand for real estate assets is likely to positively affect hotel values.2) The TCJA's significant reduction in corporate taxes, increasing cash flow for corporationsWith increased cash flow, companies may loosen their purse strings on corporate and group meeting travel.Companies are already sharing their higher profits with employees to some degree, which will enhance consumer discretionary income for travel.Repatriated profits may be reinvested for company growth.3) The current administration's pullback on federal regulations has increased optimism on the part of businesses.Greater capital investment in research, plants, and equipment may be stimulated, which should in turn generate stronger commerical, and even meeting and group, demand for hotels.Additional job growth is likely to result from increased corporate investments in growth.4) The TCJA tax law will put more money in the pockets of many consumers over the near term. However, the limitation on SALT (state and local taxes) deductions may lead to lower earnings for high-income consumers in states with high state income taxes and home values. The net impact on consumer behavior in the travel arena should be positive.5) Stronger economic growth and more stringent immigration policies will create an increasing strain on a labor force that is already at a low 4.1% unemployment rate. Employers already, and will have to continue to, compete for labor by offering higher wages. As labor is the highest expense of a hotel, higher wages will continue to create a drag on hotel earnings.6) The actions and policies of the current administration have resulted in a pullback of international travel to the U.S., affecting coastal hotel markets, a trend that is likely to continue over the next few years. However, a weaker dollar should offset some of this decline and encourage U.S. residents to travel domestically.7) Hotels are under increasing pressure to upgrade their physical plants by the brands and competitive forces; costly upgrades can extend the economic life of an asset, but may not be economically justified in some markets.8) OTAs and Airbnb continue to disrupt the lodging industry, increasing the cost of acquiring guests and drawing guests away during peak demand periods, in turn creating a drag on ADR and NOI growth. While hotel companies and the AH & LA are forging a strong counterattack, the battle will continue.9) The benefits of the TCJA for commercial real estate may stimulate more development, which could increase the risk of overbuilding. However, lenders remain disciplined in their financing of new construction, and rising construction costs are creating headwinds for many projects, thus slowing the pipeline.10) The TCJA is likely to trigger higher inflation due to the economic stimulus it creates; inflation, which averaged 2.1% in 2017, is currently projected to rise 40 to 50 bps in 2018. Moderately higher inflation can be good for hotels if it translates to higher room rates.11) The larger deficit created by the TCJA, combined with a reduction in Treasury bill (T-bill) purchases by the Fed and other countries, is anticipated to lead to higher interest rates, which may affect hotel values. The federal funds rate now stands at 1.5%; the Fed plans to raise the federal funds rate three more times in 2018 if the economy continues to show strength. If growth surges, the increase could be higher. So far, hotel mortgage interest rates have sustained their historic low levels because of reduced spreads and a flattening of the yield curve. Commercial mortgage interest rates are expected to be somewhat volatile over the course of the year, but with a further tightening of spreads, should rise by only 50 to 75 bps.The following chart sets forth the derived capitalization rates for full-service hotels (green line), compared to the ten-year T-bill yield and hotel mortage interest rates, as reported by the American Council of Life Insurers. Cap rates, which reflect a weighted cost of capital, currently well exceed the cost of debt, allowing for an equity cushion over debt service. Hotel mortgage interest rates, as reported by the ACLI, remained stable in 2017. The spread between the hotel mortgage interest rates and the ten year T-bill tightened in 2017, helping to maintain low interest rates for hotel investors. Looking forward, the selloff of bonds has pushed up the yield on T-bills. In the wake of the tax cut package, the U.S. government will have to issue more debt in an environment where the demand for debt by the central bank, and possibly by offshore investors, is set to decline, causing an increase in interest rates.Hotel Capitalization Rate and Mortgage Interest Rate TrendsWhen evaluating the outlook for hotel cap rates, data derived from publicly traded REITs can provide insight into future trends. The stock market surged in 2017, with the Dow Index ending up 24.0%. In contrast to the Dow, the mean return of 19 publicly traded hotel REITs was 3.9% in 2017, following a strong 19.3% in 2016. Implied REIT cap rates, derived from investment banker bulletins and calculated as EBITDA divided by enterprise value (equity value plus debt) as of the calendar year's end, are set forth in the following table. Implied REIT capitalization rates trended up through year-end (YE) 2015, but then declined 80 bps as of YE 2016 and another 20 bps as of YE 2017. While hotel REIT stocks did not benefit greatly from from the soaring stock market, REIT investors appear to be more optimistic in their outlook for hotel performance, providing support for the premise that the countervailing forces at work will generate renewed optimism by hotel investors. With GDP increasing by over 3% in the 2nd and 3rd quarters of 2017, and the impact of the TCJA ahead, the positive outlook appears warranted.Capitalization Rates Derived from Select Lodging REIT DataOutlook for Hotel Values and Cap RatesThe key factors summarized in this article can be narrowed down to two major elements affecting hotel values and cap rates over the near term: changes in NOI (as driven by factors influencing operating revenue and expense) and increases in the cost of debt financing. A sensitivity analysis has been performed for a sample hotel, including varying NOI[5] growth levels and hotel mortgage interest rates to assess the potential impact of these factors. A mortgage-equity, ten-year DCF was performed assuming a 70.0% loan-to-value ratio, and an equity return requirement of 18.0%; these metrics were held constant,[6] while interest rates and NOI growth rates were varied incrementally. NOI changes were calculated as compound annual growth rates (CAGR) from the historical trailing-twelve-month (TTM) NOI to the fourth forecast year, with 3.0% increases thereafter. The resultant value per room of this sample hotel for each permutation is set forth in the chart to follow.A baseline value of $235,000 per room has been selected under a scenario assuming a 2.5% CAGR over four years and a 5.0% interest rate.[7] If this same hotel's NOI increases at a CAGR of 5.0% over four years, at the same 5.0% interest rate, the value would increase by 11.0% to $262,000 per room. If the interest rate rises to 6.0%, the value at the same 5.0% CAGR would increase by only 6.0%, but the higher NOI growth would more than offset the interest-rate increase. If NOI decreases by a 2.5% CAGR, the hotel's value would decline by 21.0% to $185,000, assuming an interest rate of 6.0%.NOI Growth and Interest Rate Impact - Hotel Value Per RoomThe change in value from the baseline, illustrated below, indicates that a CAGR of 2.5% per year in NOI is not enough to offset a 100-basis-point increase in interest rates; the interest-rate increase is more than offset at a 5.0% CAGR. Thus, we can conclude that the impact of rising interest rates will be modest if the economic forecasts of higher GDP growth hold true. Experts are prognosticating a RevPAR increase of roughly 50 bps over the rate of inflation in 2018, driven primarily by average rate; if operating costs hold, net income levels should continue to rise. The extent to which they do will be determined on the local market and property level. Based on this analysis, a 50- to 100-basis-point increase in interest rates will have a minor impact on values if NOI increases by 2.5%, while greater growth will more than offset the interest-rate rise.NOI Growth and Interest Rate Impact on Baseline ValueThe cap rates associated with each valuation scenario are set forth below. Higher projected NOI growth lowers the cap rates, assuming a constant interest rate, as an investor is willing to price an investment at a lower rate of return with the anticipation of stronger NOI growth going forward. Assuming a constant rate of growth, a 100-basis-point increase in the base interest rate, from 5.0% to 6.0%, increases the cap rate by 30 to 50 bps. The impact of varying NOI growth rates is more profound. At a constant 5.0% interest rate, a 2.5% CAGR decline in NOI results in a 9.5% cap rate on TTM NOI, while a +7.5% CAGR in NOI results in a 6.5% cap rate.NOI Growth and Interest Rate Impact - Cap Rate (Historical TTM NOI)The free-and-clear discount rate resulting from each valuation scenario is presented below. The discount rate varies by 110 to 130 bps from the low to high range of interest rates, but varies by only 30 bps when interest rates are held constant and growth rates are varied. A comparison of the cap rates and discount rates reveal that the differential between these two metrics increases with greater growth, which is no surprise since a discount rate equates to a cap rate plus the rate of change.NOI Growth and Interest Rate Impact - Discount Rate (10 Year DCF)ConclusionThe current U.S. political landscape and the policy and regulatory changes will undoubtedly alter the economic landscape in the near future. Ultimately, these shifting sands will affect the hotel investment environment, as well. Taking the countervailing factors into consideration, higher economic growth will likely become apparent later in 2018, which will in turn result in stronger hotel performance that will facilitate new supply absorption and offset the impact of higher interest rates. Debt and equity capital for hotel investments is expected to remain widely available. Cap rates are likely to remain stable or even moderate despite higher interest rates due to the prospect of higher growth; hotel values should sustain their current levels or rise moderately, barring any unforeseen event. If the TCJA further stimulates the economy, hotel values should resume their rise, which had slowed over the past two years. As always, we caution that the value of a given hotel can only be measured by an evaluation of the specific property and local market factors affecting an asset.This dollar volume will rise marginally as additional sales data are captured and confirmed by RCA.RCA defines portfolio transactions as those that comprise two or more properties. In an entity transaction, only the allocated real estate asset values are recorded in the RCA sales data; the value of company franchise and management operations are excluded.Cap rate and discount rates derived from actual transactions appraised by HVS at the time of sale.The factors summarized represent only a partial list of the numerous provisions of the Tax Cut and Jobs Act that will affect commercial real estate; please contact a tax professional for a complete assessment of the tax law provisions.Earnings before interest, taxes, depreciation, and amortization (EBITDA) and after a 4% reserve for replacementTerminal cap rates were varied by 50 bps to synchronize with the cap rate derived from the calculations.If a different baseline scenario is selected, the impact on value of varying NOI growth rates and interest rates can be calculated as the % change between the respective values per room in the table.


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