Hotel expert says hospitality sector is rebounding nicely from pandemic

Rich Lillis knows a thing or two about the hotel industry. He should. He started in the business working at local hotels, rose into management and then transitioned into financing.

Today, he is executive managing director for the U.S. hotel division of Colliers International. He’s a frequent speaker on the hospitality industry and works with clients on hotel and resort investment, sales and financing in Florida as well as the East Coast and the Caribbean.

As a Floridian — he lives in Boca Raton — he has deep understanding of what is happening on the Gulf Coast.

Lillis is optimistic about how the industry is recovering after a disastrous 2020 when COVID-19 brought tourism to virtual standstill. He says investors are showing their positivity by snatching up properties along the coast and that hotel owners and operators are holding steady on higher rates to avoid the mistakes of previous downturns. And to keep revenue steady as costs go up.

While watchful, Lillis remains bullish on how popular the hospitality industry will remain with investors as people continue to travel.

“We are watching interest rates carefully because obviously that has an affect on both construction and acquisition financing. But at this point the market still seems to be quite liquid on the transactions side,” he says. “There seems to be just an awful lot of capital. And, you know, these Florida markets are among the most attractive anywhere for hotel investment.:

Lillis recently spoke with Business Observer about the industry recently. Edited excerpts:

What we’ve seen the past couple of years: Before the pandemic, we were very late in our cycle. And so the performance of the industry was very strong. But it basically was plateauing. Because (of) the hotel demand growth, and the hotel supply growth, we're roughly in an equilibrium. So what that meant was the hotel performance of any given hotel probably was pretty stable. And it wasn’t really improving or decreasing at all.

And so, we were all just kind of waiting to see what was going to happen towards the end of the growth cycle. And if you recall, that growth cycle was very long, it lasted around 10 years or so coming out of the last recession.

Then of course, the pandemic came, and it was pretty disastrous for lodging demand pretty much everywhere starting in March 2020. And then in 2021, we saw with the vaccinations and some people poking out that there was a very good recovery in a lot of areas. And the recovery that did occur in 2021 was mostly leisure driven. And that really helped us in our leisure oriented coastal markets. Nationally, and even statewide in Florida, we bench 2019 as the last kind of base year or normal year. And so nationally we have not recovered to ‘19 business levels.

But in many of our Florida markets, we’ve already recovered to 2019. For example, in the overall Tampa market, we basically achieved the 2019 business levels by the end of 2021. And that’s true, up and down the west coast of Florida, driven by this leisure demand.

Revenue is a strong indicator of the resurgence: Our primary 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 a variation and what we’ve seen is the hotels have been able to raise the rate more quickly than occupancy, which is kind of an interesting dynamic. I don’t know if you’ve tried to travel or to spend a weekend in Naples or St Pete Beach or somewhere, but you’ll see the rates are very, very high and higher than they’ve ever been. And so that’s one of the dynamics that we’re seeing.

The leisure traveler seems to be flush with money and they’re determined to take their little vacation. And the hotel owners in this environment, especially in these prime leisure areas up and down the beaches seem to be able to have a lot of pricing power. So, we are seeing, in the numbers, that the occupancy is generally not quite as high as it was in the stabilized 2019 timeframe. But the average daily rate seems to be much higher in many markets, especially those leisure ones, your Clearwater, St. Pete, Sarasota, Fort Myers Beach, Naples. If you look elsewhere in Florida, the Florida Keys, just crazy kind of waves that are going on.

Investors feel good: Despite the COVID-19 situation, the market has recovered quickly on the strength of the leisure demand. And generally, there is optimism among investors that the other segments likewise will recover as there is, for example, this pent-up demand for a business-related travel. And then, probably the last one, would be convention kind of travel.

Investors are overall optimistic by what they’ve seen in the trends and the projections. We saw transactions in 2020 fall to a very low level. And then in 2021, based on the trends and the optimism, we saw the transaction market basically recover to the normal level of what it would have been like, approximately, in 2019. If you look across the region, Tampa and then south, the transaction activity was fairly strong through 2021 and 2022, so far.  

What we’re also seeing is, there’s a lot of liquidity in the market. So there’s all kinds of funds that are looking for hotels, especially in these prime Florida markets. So, based on the optimism and the amount of liquidity, we are seeing transactions trending at a higher price point because it is more competitive...generally, investors are optimistic and that leads to very strong pricing.

On the development side: We are seeing a kind of a continuation of the development trends that were pre-COVID. These projects normally have a cycle of three years or so. And it seems like the development activity in these prime markets continues kind of at the same kind of level. For example, in the Tampa market, we see construction of, I think, 2.5% of supply, which is kind of a normal historical kind of level. So, COVID didn’t really seem to affect the development pace as maybe some would expect.

I would say development is not extremely robust, but it hasn’t taken much of a hit either. So, you’ll see projects coming on throughout the region in the next couple of years.

Rates traditionally drop during downturns. Not this time: I’ve marveled at that. Honestly. And it really is remarkable. In the last downturn in 2008, ’09, ‘10, the rates just fell in that time period. I think the owners and operators, for whatever reason, felt they had to protect market share at the expense of pricing.

I think this cycle they learned how to survive during 2020. In some cases, the occupancy was down around 10% and they were able to operate their business and to survive. Then coming out of it, I think they just kind of discovered they really have pricing power and the owner/operators have realized that a fight to the bottom of pricing is pretty self-defeating. And the hotel owners and operators are facing rising costs as well. They’re experiencing inflation on everything themselves. So, I think I they’re being astute businesspeople.