Bisnow Exclusive: Hotel Metrics Guru Patrick Ford
Patrick Ford has lived and breathed hotels for most of his life. He washed dishes at a resort in New Hampshire while still in high school, then after graduating from the University of New Hampshire with a degree in hotel administration went to work for a regional operator called the Dunfey Hotel Co, which would later become Omni Hotels. After rising to director of operations, he left there in the late 1970s to start up his own hotel brokerage firm.
Patrick is 73 now and better known as the chairman and CEO of Lodging Econometrics, a research firm he started in 2001 in Portsmouth, NH, when he noticed a lack of data tracking hotel development and deal-making. Firms like Smith Travel Research could tell you occupancy rates in every hotel in Louisville from one month to the next, he noticed, but didn’t have a clue about any plans for new construction. He has devised a widely watched pipeline report that follows every new hotel proposed in the US, no mean feat for his firm of 40 statistics-hungry employees.
The hotel industry is coming off a banner year, for both operators and deal-makers. Ford sat still for a conversation on the state of the industry:
Bisnow: Just how good was 2015 for the hotel industry?
Patrick Ford: It was a super year at the operating level. Occupancies in the US last year reached 65.6%. That’s up from a post-recession low in 2009 of 55.1%. We believe we’re enjoying the best occupancies of any period in the past 35 years. Even in 2006, a very strong time, the occupancy was only 63.3%. So rooms have been filled at the highest rate in the past generation at least.
Bisnow: Are the higher occupancies setting off a wave of new construction?
Patrick Ford: It’s not a wave at this point, but the trend is definitely up. We ended last year with a pipeline of new hotels—those either under construction or planned to be built—totaling 4,413 projects and 546,135 rooms. That’s the highest total since 2008, but still below the 2007 cyclical high of 5,438 projects with 718,387 rooms. Right now, the number of hotels currently under construction, 1,312, is up 21% over the total a year ago, and another 1,926 are scheduled to start up in the next 12 months.
Bisnow: Is the pipeline going to keep growing?
Patrick Ford: We think we have another couple of years of strong new development in front of us, with the pipeline getting bigger during that time. Will it match the size of the pipeline in 2007? That’s hard to say, but it very well could. These are ideal conditions for hotel developers—occupancies are high, room rates are at all-time highs, money is readily available for construction and interest rates are low. Plus, there seems to be no sign of recession on the horizon.
Bisnow: But your researchers tell us there is a pipeline of more than 200 hotels waiting to open in New York, 167 in Houston and 121 in Dallas. Isn’t there a real danger of overbuilding, particularly if the economy falters at all?
Patrick Ford: We are a long way from having to worry about overbuilding. Hotel owners always worry about new competition. And Wall Street analysts get concerned, too. But if all these hotels get built the impact on occupancy rates is likely to amount to less than one percentage point.
We added 100,000 hotel rooms in this country last year to get over the 5 million total for the first time. Ten years ago the total was around 4.35 million. The pipeline has been growing steadily at the same time that occupancies have risen. Corporations are traveling their employees again.
Bisnow: Critics also worry that hotel values have become overheated. In the past year both the Waldorf Astoria and the Baccarat hotels in New York have changed hands for close to $2B. These prices look crazy to some.
Parick Ford: These prices do seem very, very high. But when people buy trophy assets like these they aren’t in it for a return today or tomorrow. They are in it for the long haul. Most investors are looking to get a return seven years from buying a hotel. For the Waldorf the new owner may be looking 70 years into the future, secure in the knowledge he has a prized asset on one of the great corners of the world that nobody else can duplicate.
The Chinese are doing much of the buying recently, and it seems to be that money is flowing from there to be put to work in what they view as a safer environment. Whether the Chinese government will approve all these big deals still remains to be seen.
Bisnow: In the process, it’s become obvious the US hotel REITs are getting outbid for most assets they’d like to buy.
Patrick Ford: Yes, that’s happening. Because they’re publicly traded, REITs have to look for assets at a price that will immediately add to their earnings. Many of the deals we’re seeing lately won’t turn a profit anytime soon. REITs can’t wait seven years for a return—it needs to start Monday morning. That leaves them out of many deals.
Bisnow: A few years ago it was widely believed the mid-scale and economy hotels out on major highways were the favored categories for new investment. But that’s changed, hasn’t it?
Patrick Ford: At the bottom of the last cycle lenders stayed away from the biggest projects in the biggest cities. They were looking for small properties on the periphery of urban areas. But now as the pipeline has gotten nearer its peak that’s changed. The push now is coming in the city center again with big-dollar projects. That’s likely to continue for another year or two.
Bisnow: Are the home-haring services like Airbnb having an impact on hotel companies?
Patrick Ford: Hotel owners worry about the homesharing competition. They worry they are taking away from the brand loyalty they’ve tried to build up over the years. So far, it’s been hard to gather statistics on the precise impact.
Bisnow: With a lot of hotels due to open this year in a good operating environment, will we see many developers eager to flip their assets?
Patrick Ford: Yes, 2016 will be a great time to finish construction and then flip to a buyer. Look for institutions to step forward as buyers in a big way. It’s less likely hotel operators themselves will be doing the buying.
Bisnow: Hotel stocks didn’t do very well last year. Both Hyatt and Hilton saw their shares fall 25% in the last six months of 2015. What does Wall Street know that we don’t know?
Patrick Ford: Analysts are noting most hotel cycles last just seven or eight years peak to peak, and so they are worried the current cycle will be running out of gas this year or next. I’m predicting that hotel profits will be peaking in 2017 or 2018, though the current positive cycle could go longer since the US economy is still not operating on all eight cylinders and there is elasticity in hotel room demand.