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CB Richard Ellis Analysis anticipates U.S. RevPAR growth of 1.6% in 2011

The recovery in the U.S. hotel sector will continue in 2011 and begin to accelerate in 2012, according to a new analysis from CB Richard Ellis Econometric Advisors (CBRE-EA). CBRE-EA forecasts that RevPAR1 for "full service" hotels will improve 1.6% over the next year and 4.4% over two years, rising to $94.21 in 3Q2011, and $98.34 in 3Q 2012. In the "limited service" category, RevPAR will grow 2.6% over the next year and 6.5% over two years, reaching $48.00 in 3Q 2011, and $51.12 in 3Q2012.

According to CBRE-EA’s forthcoming Annual Trends 2011 report, the hotel industry in 2010 recorded positive year-over-year growth in the three main performance measures: occupancy, ADR2 and RevPAR. Occupancy has increased this year by more than 400 basis points (bps) in both the full-service and the limited-service categories, and RevPAR has grown by nearly double digits on a year-over-year basis. As the hotel recovery forges ahead, further increases are expected to continue in 2011, albeit at a slower pace.

"The significant growth of room rates over the next couple of quarters, combined with continued occupancy gains, will bring RevPAR levels closer to their previous peak in 2007. It will take slightly longer than in earlier recoveries, but we expect that by 2014 both full-service and limited-service RevPAR will be expanding," said Abigail Rosenbaum, Economist, CBRE-EA.

The report notes that as the hotel sector further recovers, ADR improvement will account for a larger share of RevPAR growth and new peak room rates are projected to be set by 2014. In the near term, however, RevPAR levels still remain 17% below their previous peak in the full-service sector, and 18% below the earlier peak in the limited-service sector. Over the next two years, the majority of the markets CBRE-EA monitors are expected to record continued healthy RevPAR growth, including San Diego, Atlanta, West Palm Beach, Nashville and Orlando.

However, occupancy will likely diminish modestly in 2011 according to CBRE-EA’s analysis. For the full-service sector, the driving force behind this expected slowing of demand can be attributed to an increase in room rates. The limited-service sector will continue to surpass full-service demand over the coming quarters as transient travelers (business and leisure) occupy more rooms.

According to Annual Trends 2011, unlike the past few years, new hotel supply is not a threat to the market’s recovery because development pipelines are diminishing. While both sectors (full and limited) saw significant supply heading into the recession, the rate of growth has been slowing since the end of 2009. Low supply growth is projected to continue through early 2012 and even when it re-accelerates, supply growth is projected to remain below 1% for several quarters (especially for the full-service sector).

Ms. Rosenbaum notes that "hotel investment has returned as buyers look to take advantage of the recovery in fundamentals. Activity increased dramatically during the last quarter, with more than 60 transactions valued in excess of $10 million taking place."

REITS are leading the charge, having consummated a vast majority of the deals in 3Q 2010. CBRE-EA reports that aggressive pricing reflects the positive outlook for underlying fundamentals and is driving additional seller interest. According to Real Capital Analytics, as of 3Q2010 the volume of hotel sales increased by 112%, compared to a year ago. Cap rates for both full-service and limited-service hotels have declined during the past year, with a greater decline recorded in the full-service sector.

"Sellers are anxious to take advantage of cap rate compression and buyers are looking to acquire at demonstrable discounts to replacement cost," adds Ms. Rosenbaum. "Debt capital has returned to the market for high-quality (i.e., cash flowing), well-branded assets. Sources include CMBS Originators, Private Equity, Insurance Companies and Mortgage REITS. However, while debt capital is now more prevalent, the market will require a lot more to fuel a broader recovery in the hospitality investment markets."

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