May 7, 2013
By Bob Coleman
Editor, Coleman Report
We sat down with Jan Freitag, a Senior Vice President at STR, his firm tracks supply and demand data for the hotel industry and provides valuable market share analysis for all major international hotel chains and brands.
He simply said hospitality lending is “good right now, some parts are very good.”
Bob Coleman: How do you see the industry performing today? If I am a small business lender should I be bullish about hospitality, should I be skittish, tell me what I should be thinking.
Jan Freitag: The cliff notes are, life is good. In some areas, life is really good. The three driving mechanisms that will capture the industry from now through 2015 are number one, very limited new supply. Lenders are still skittish. Hotels unfortunately have this dirty little secret that our leases don’t last ten years, they only last one night. So that makes it very risky.
The good news is that we have very limited supply today and healthy demand growth.
Bob Coleman: Limited supply means there’s been no new construction. So you are seeing the economy picking up?
Jan Freitag: If you pick your outlet of choice, New York Times, Fox, CNN, LATimes, the front page reports that life as we know it is coming to an end. But then you open up every Wednesday our data (Star Report) and what you are seeing is, life is great. The first quarter of this year, we sold more rooms than in any other first quarter ever going back to 1989.
Bob Coleman: My bankers are statisticians, give me percentages.
Jan Freitag: We sold 250 million room nights which is 2.6% higher this first quarter than it was for the 2012 first quarter. So that’s great. If you couple that with the lack of new supply that I was talking about, we are currently seeing for the first quarter a room supply increase of 0.7%. To put that in perspective the 25 year average is 2.1%. We are well below the long term average on supply and we are well above the long term average on demand. That means all of those new people can stay in two sorts of rooms, new rooms or existing rooms. And there are very few new rooms so they have to stay in existing rooms which means occupancies are going up which then gives hotels pricing power, which then boosts their NOI (Net Operating Income), which makes debt service very easy to come by.
Bob Coleman: Jan Freitag, STR, I appreciate the update, thank you very much for telling us what’s going on in hospitality.