Analysis: Hotel Occupancy Levels Expected to Hit 30-Year High by 2016

Limited new development in the hotel sector is expected to push national hotel occupancy rates to their highest level in 30 years, according to a report from financial and professional service firm JLL.

JLL projected that hotel occupancy would approach 65 percent by 2016, resulting in growth for the average daily rate (ADR) for rooms charged in the industry.

Dan Hansen, president and CEO of  Summit Hotel Properties (NYSE: INN), said the report underscores the strong demand and occupancy gains he sees across his company’s portfolio.

“In many of the top 50 markets, we are seeing levels that we haven’t seen in some time,” Hansen said. Hansen attributed part of the increase to the use of social media to fill some nights when demand for rooms is weaker and a resurgence of group demand.

“As occupancy continues to rise to historic highs, that would be an indicator of strong rate growth to continue as well,” Hansen noted.

U.S. Hotel Transactions Projected to Reach $25 Billion in 2014

The JLL report also indicated that capital markets activity in the sector is posting significant growth as hotel performance is on the upswing and investors are able to underwrite steady growth.

Debt financing is flowing into the sector, and the issuance of hotel commercial mortgage-backed securities (CMBS) is rising. As a result, 2014 will be the third-most active year for U.S. hotel transactions on record at a projected $25 billion in volume, according to JLL.

Hansen noted that although the high level of portfolio transactions during the last year has reduced the number of large portfolios that are available to purchase, “debt is still readily accessible and the fundamentals of the industry are strong, so we would expect another year of strong transaction volume” in 2015.

The favored product types for new development are premium-branded select service hotels, according to JLL.  The report pointed out that although their ADRs are 25 to 35 percent lower than those of their full service counterparts, their cost of construction can be notably lower.

In addition, capitalization rates for full service and select service hotels are converging and, in many instances, are narrowing to a spread of 100 basis points, JLL said.

“I see the convergence as a real validation of the strength of the premium select service brands and the offering they provide,” Hansen said. “So, logically, the value of those types of assets would start to be reflected in cap rates.”