Hospitality expert says hospitality industry is recovering well from pandemic | Business Observer
Rich Lillis knows a thing or two about the hospitality industry. He should. He started in the business working in local hotels, moved into management, then moved into finance.
Today, he is the executive general manager of the American hotel division of Colliers International. He is a frequent speaker on the hospitality industry and works with clients on the investment, sale and financing of hotels and resorts in Florida as well as the East Coast and the Caribbean.
As a Floridian — he lives in Boca Raton — he has a deep understanding of what’s happening on the Gulf Coast.
Lillis is optimistic about how the industry is recovering after a disastrous 2020 when COVID-19 brought tourism to a virtual standstill. He says investors are showing their positivity by snapping up properties along the coast and hotel owners and operators are keeping rates higher to avoid the mistakes of previous downturns. And to keep revenues steady as costs rise.
Though vigilant, Lillis remains optimistic about the hospitality industry’s popularity with investors as people continue to travel.
“We are watching interest rates carefully as this obviously has an effect on construction and acquisition financing. But at this point the market still seems quite liquid on the transaction side,” he says. seems like there’s a lot of capital in there, and, you know, these Florida markets are some of the most attractive for hotel investment:
Lillis recently spoke with Business Observer on the industry recently. Edited excerpts:
What we have seen in the past two years: Before the pandemic, we were way behind in our cycle. And so the performance of the industry has been very strong. But it was basically a set. Due to growth in hotel demand and growth in hotel supply, we are roughly in balance. So that meant that the hotel performance of a given hotel was probably quite stable. And it wasn’t really improving or decreasing at all.
And so, we were all kind of waiting to see what was going to happen towards the end of the growth cycle. And if you remember, this growth cycle was very long, it lasted about 10 years coming out of the last recession.
Then of course, the pandemic arrived, and it was quite catastrophic for the demand for housing almost everywhere from March 2020. And then in 2021, we saw with the vaccinations and certain people going out that there was a very good recovery in many areas. And the recovery that happened in 2021 was mostly about recreation. And that has really helped us in our leisure-oriented coastal markets. Nationally, and even statewide in Florida, we consider 2019 to be the last type of baseline or normal year. And so nationally, we haven’t found the activity levels of 19.
But in many of our Florida markets, we’ve already recovered through 2019. For example, in the overall Tampa market, we’ve basically reached 2019 activity levels by the end of 2021. And that’s true, along the west coast of Florida. , driven by this demand for leisure.
Revenue is a strong indicator of recovery: Our main data point is revenue per available room, which is a combination of occupancy and average daily rate. (RevPar.)
In the Tampa market, the revenue per available room in 2021 is approximately equal to 2019. But there has been variation and what we have seen is that hotels have been able to increase the rate faster than occupancy , which is quite interesting. dynamic. I don’t know if you’ve tried traveling or spending a weekend in Naples or St Pete Beach or anywhere else, but you’ll find the rates are very, very high and higher than they’ve ever been . So that’s one of the dynamics we’re seeing.
The leisure traveler seems to be strapped for cash and is determined to take his little vacation. And hotel owners in this environment, particularly in these prime recreation areas along the beaches, seem to be able to wield a lot of pricing power. Thus, we note, in the figures, that the occupancy rate is generally not as high as it was at the stabilized 2019 horizon. But the average daily rate seems to be much higher in many markets, especially the recreational ones, your Clearwater, St. Pete, Sarasota, Fort Myers Beach, Naples. If you look anywhere else in Florida, the Florida Keys, it’s crazy waves happening.
Investors feel good: Despite the COVID-19 situation, the market recovered quickly thanks to the demand for leisure. And generally, investors are optimistic about the recovery of other segments, because there is, for example, this pent-up demand for business travel. And then, probably the last, would be some sort of convention trip.
Investors are generally optimistic by what they have seen in trends and projections. We have seen transactions in 2020 fall to a very low level. And then in 2021, based on trends and optimism, we saw the deal market basically return to normal levels of what it would have been, approximately, in 2019. If you look across the region, Tampa then the south, the transaction activity has been quite strong in 2021 and 2022, so far.
What we also see is that there is a lot of liquidity in the market. So there are all kinds of funds looking for hotels, especially in these prime markets in Florida. So based on optimism and the amount of cash, we see that trades tend to be at a higher price because they are more competitive…generally investors are optimistic and this leads to very high prices.
On the development side: We are seeing a sort of continuation of development trends that were pre-COVID. These projects normally have a cycle of about three years. And it looks like the development activity in these top markets is continuing at the same level. For example, in the Tampa market, we see the build of, I think, 2.5% of supply, which is sort of a normal historical level. So COVID didn’t really seem to affect the pace of development like some might expect.
I’d say the development isn’t extremely robust, but it hasn’t suffered much either. So you’ll see projects unfold across the region over the next couple of years.
Rates traditionally fall during a downturn. Not this time: I marveled at it. Frankly. And it’s really remarkable. During the last recession in 2008, ’09, ’10, rates just dropped over that period. I think owners and operators, for whatever reason, felt they had to protect their market share at the expense of price.
I think that cycle, they learned how to survive in 2020. In some cases, occupancy went down about 10% and they were able to run their business and survive. Then, on the way out, I think they just discovered that they really had pricing power and the owner/operators realized that a bottom-up price fight is pretty doomed. And hotel owners and operators are also facing rising costs. They know inflation all over themselves. So I think they are savvy businessmen.