Room-Rate Recovery

Room-Rate Recovery

By David R. Corder

Associate Editor

Just a few years ago, Ron Allen quietly harbored an entrepreneur's worst fear. The Osprey hotel developer opened a brand new hotel in the aftermath of 9-11 - one of the lowest points in the history of the U.S. lodging industry. Many small-lodging businesses foundered in the wake of this devastating socioeconomic upheaval.

Allen's strategic plan for more development came to a halt. It took every ounce of his business acumen just to prevent Allen Investments Inc. and its four hotels in Sarasota and Manatee counties from foundering. While he never considered failure as an option, Allen acknowledges, "We got the socks scared off us."

It's a different story now. Each of Allen's hotels now produces near record-level occupancy rates and revenue per available room (RevPar). Except for isolated instances, nearly every submarket in the Gulf Coast region appears stable and growing. Only the hurricane-ravaged Fort Myers-Sanibel submarket exhibits any sign of weakness.

"We're doing better in 2005 than we've ever done," Allen says.

The market growth has been so strong throughout the Gulf Coast region that Smith Travel Research, which tracks the nation's lodging industry, ranks the Tampa-St. Petersburg-Clearwater metropolitan statistical area (MSA) as one of the nation's fastest growing hospitality markets.

Citing the research firm's data, New York's UBS Securities LLC ranks the Tampa MSA as the fourth fastest-growing market in terms of RevPar among the nation's top 25 commercial markets through the first five months this year. The market ranks behind only Oahu Island, Hawaii, Seattle and Miami in RevPar growth, with a nearly 17% increase over the same period last year.

Occupancy in the Tampa MSA averages about 75.2% through the first five months this year, the Smith Travel data shows. During the first half of 2002, it averaged only about 65.5%.

The Sarasota-beaches submarket shows some of the strongest gains for a small metropolitan market. Occupancy there averages about 80.3%. Two years ago, it averaged only about 65.2%.

Increased occupancy in Sarasota pushed RevPar up by 12.7% over the first five months this year. Consequently, average daily room rates increased by 9.8% over the same period.

The same holds true for Bradenton-airport submarket. Room occupancy averaged 76.7% through the first five months this year. Two years ago, it averaged about 67.1%.

On that growth, RevPar in Bradenton grew by 17.7% during the first five months. Average daily room rates responded with a 12.9% increase over the same period.

The growth in occupancy and RevPar means hoteliers can withdraw lodging offers from the discount Internet travel vendors, says Smith Travel director Jan Freitag.That means more opportunity for increases in average daily room rates.

"Interesting enough here, there is no new (room) supply coming on line," Freitag says about each of the submarkets in the Gulf Coast region. "There's actually been a slight decrease in rooms. This is definitely great for existing hotels. Existing hoteliers are taking full advantage to increase their rates."

In the Sarasota-Manatee markets, Allen says, "is the loss of hotels as developers tear them down for condo conversions. That's actually been a big help to us."

Despite the resurgence, hotel developers such as Allen have responded cautiously. Increased land and construction costs have forced the lodging industry to re-evaluate development strategies.

"It takes two years from start to finish to build a hotel because of the red tape in getting governmental approval," Allen says. "Over and above that the cost of land is out of sight. It's a seller's market. Then on top of that you have the cost of construction. That is way up. It's a high risk. It's a higher risk now than it's ever been to build a hotel."

Because of such risks, hotel developers are turning to more creative strategies. The result is an increased focus on condominium-hotels.

"Development costs are a challenge," says lodging industry expert Dan Peek, managing director of Tampa's Regent Street Hospitality Investment Advisors LLC. "Banks are fairly disciplined on the development side. That's why you see more condo-hotels."

At Bradenton's Lakewood Ranch, for instance, New York developer SS Appel & Co. Inc. is exploring the feasibility of a condo-hotel. Dr. Murray "Murf" Klauber, owner of Longboat Key's Colony Beach & Tennis Resort, has proposed the development of a 45- to 55-story condo-hotel in Tampa's Channel District. St. Petersburg's JMC Communities has plans to build a condo-hotel on Clearwater Beach. These are just a few of the more higher-profile developments.

"We are seeing more mixed-used facilities," says Miami lodging industry expert Sheldon Greene. "One of the reasons is a developer can pre-sell the condominium units. Thereby he doesn't need as much financing. The lenders feel comfortable so long as they see legitimate presales."

However, the condo-hotel concept still accounts for only a small percentage of the hotel investment market, Peek says. "There are unique construction opportunities, but most of what you're seeing out there is existing asset sales."

There's a particular reason for this, Peek adds.

"Hotel investment has never been stronger than it is right now," he says. "It's a variety of reasons. Obviously, low interest rates helps. But the availability of investment capital is very high. (Hotels) also currently offer the best yield in the real estate market."

The interest in existing hotel properties is so high that several interested buyers have approached Allen. While he has no plans to sell, he is listening to offers from what he describes as powerful names in the lodging industry.

"I've been getting calls over the past two years even as things have gotten better," Allen says. "They were mostly tire-kickers as I call them or Realtors wanting a listing. Now we're getting a tremendous amount of interest from people out of New York and California looking to buy existing hotels. There are a lot of people wanting to get into Florida."

Fueling the buyers' interest is the fact most good lodging development sites are already developed, Allen says.

"Even if a hotel is rundown, they can come in and put in a bunch of money and remodel it," he says. "They still can come out a whole lot better than starting a hotel from scratch. You have to realize once you build a hotel you've got another year just to get it on its feet. The first year is always the worst year."