Recent news reports indicate that the hotel sector is coming out of its doldrums. Occupancy rates are picking up nationwide, as evidenced by the increase in nightly hotel rates, especially in the hot spots like New York, Orlando and Las Vegas. People are traveling again, as families are feeling more confident about the economy, or are at least ready to reward themselves with that long-delayed vacation. Convention attendance is increasing after several lack-luster years due to corporate cut-backs in travel expenses.
Las Vegas is enjoying the increase in travel, as more and more conventions return to the city. Today’s Wall Street Journal has an interesting article about the Lake Las Vegas development, which is a planned development with homes, hotels, apartments, retail and a golf course centered around a 320 acre, man-made lake. The recession hit this development hard, since it is off the popular Las Vegas Strip. The original hotel operator, the Ritz-Carlton, closed its hotel and casino in 2010, and the company that owned a large portion of the undeveloped land filed for bankruptcy protection. When I was out there in the fall of 2011, the development looked and felt like a ghost town, even though the hotel and casino were open again and operating under a new management. The lake level was down due to draught in the area, the artificial waterfall at the entryway was dry, and the lake had large patches of pond scum along the retail/restaurant area. But the increase in tourist traffic that has hit Las Vegas generally has helped resurrect Lake Las Vegas as well, and the waterfall is working again, according to the WSJ article.
Not only in Las Vegas, but throughout the country, hotels are beginning to enjoy an increase in occupancy rates. And with increased occupancy rates comes new hotel construction. In the last several years, there has been very little new hotel construction, but the increase in occupancy that we are now seeing allows hoteliers to increase their room rates, and with the prospect of profit, more developers and lenders are willing to begin hotel construction again. New York City is the hottest location for new hotel construction, with 7,248 rooms currently under construction. One of the reasons is, of course, the enduring popularity of New York as a destination. Even in 2010 and 2011, occupancy rates exceeded 80% annually in New York, evidencing the continued demand for hotel rooms in the Big Apple.
What is surprising is that the other part of the hotel construction boom is taking place in small-town American, fueled by demand by oil-shale production in areas like North Dakota, Texas and Oklahoma. In these areas, the hotels being built are far different than those being built in New York City. In oil-shale country, the demand is for budget and midscale hotels aimed at serving the oil-shale workers and other energy-industry employees, and the hotels are geared towards the workers who drill and complete the wells in the area. Hotel chains like Microtel and Hampton Inns are at the right price point for this type of demand. There is the question, however, of how well these new hotels will fare once the oil workers have moved on to the next job, or if the gas and oil prices decline, leading to less demand for the product.
This hotel construction boom is also fueled by the willingness of lenders to make more construction loans. After 2007, there were virtually no lenders willing to advance funds on hotel construction, since hotels are one of the riskiest sectors in the commercial real estate industry. But the new loans are not the same as pre-2007. Today’s Wall Street Journal reports that Joe Hoesley, vice president of commercial real estate for U.S. Bankcorp, says that the bank’s underwriting criteria continues to be conservative. Most banks will only agree to cover 50% to 60% of the project costs, and interest rates are higher on hotel construction loans than on other sectors such as office buildings or apartments.
For the real estate industry, the increases in hotel occupancy rates and in hotel construction are good news. Perhaps the economy will continue to grow so that those new hotels being built in Oklahoma and North Dakota will prosper, and not be part of a building bubble that pops too soon.