Page 10AA —
COLORADO REAL ESTATE JOURNAL
— December 2-December 15, 2015
Hospitality
D
espite the volatile
nature of the oil
industry, the national
economy has gotten back on
track over the past five years,
which has resulted in a change
in consumer behavior across
the country. With a stable econ-
omy, consumers are now mak-
ing more money, which allows
them to spend more. An added
benefit of this stability is the
rise in leisure travel. Leisure
travel, that is travel for pleasure
rather than for business, has
reemerged as a national trend,
greatly benefitting states like
Colorado that have a diverse
offering for tourists and guests.
Colorado is consistently one
of the most sought-after des-
tinations in the U.S., and in
2014, set state records for the
tourism industry, with 71.3
million visitors spending $18.6
billion within our borders. In
2014, Colorado saw a 7.4 per-
cent increase over 2013 in this
spending, nearly 3 percent
more than the national average
of a 4.5 percent growth. Addi-
tionally, Denver trends are
showing a 9 percent hotel valu-
ation index growth in 2015,
which outpaces the national
growth of 7 percent. These sta-
tistics indicate that Colorado is
outpacing the national tourism
growth rates in every category.
What’s most interesting is that
66 percent of the money spent
was a result of lodging costs for
overnight visitors.
Boasting five professional
sports teams, acclaimed shop-
ping areas, the nation’s most
a c c l a i m e d
o u t d o o r
amp h i t h e -
ater
and
proximity to
the moun-
tains, Denver
is not sur-
prisingly one
of Colora-
do’s top trav-
el destina-
tions. Drive
just a few
hours out-
side of Colo-
rado’s most prominent city and
visitors can explore the beauti-
ful Rocky Mountains, whether
for the scenic views found in
Rocky Mountain National Park
or world-class skiing at one of
Colorado’s 28 ski resorts. With
more than 700 square miles
of national parks, visitors can
hike among the golden aspens
in Rocky Mountain National
Park, play in the giant sandbox
that is the Great Sand Dunes,
or take in Colorado’s breath-
taking views at Mesa Verde
National Park or Black Canyon
of the Gunnison National Park.
It’s a safe assumption that
regardless of what travelers are
seeking, Colorado has almost
anything they could be look-
ing for, and hotel and lodging
statistics back up that notion.
According to Smith Travel
Research, so far in 2015, nation-
al occupancy rates have sur-
passed the all-time-high mark
set in 1995, and that looks to
stay on target through the end
of 2015. While there are hun-
dreds of metrics used to mea-
sure travel and spending, the
two that show the industry’s
overall strength are average
daily rates and revenue per
available room.
When compared to the
national averages, it’s clear
that Colorado outpaces much
of the competition. The Colo-
rado ADR is higher than the
national average at $125 per
room, which indicates a high-
er demand for our hotel and
lodging space versus that in
many other states. Colorado’s
RevPAR, which is a more tell-
ing statistic for measuring both
ADR and occupancy rates, con-
tinues to increase year after
year, and currently sits at $81
per room, which is nearly $2
more than the national aver-
age.
Even though the national
occupancy rate has overcome
the 1995 all-time-high record,
Colorado, and specifically
Denver, is seeing even more
success. Colorado’s occupancy
rates are surpassing the nation-
al level, but Denver’s rates are
a solid 10 percent above the
national level. Again, this is
one of many indications that
Denver is enhancing its posi-
tion as a top destination for
leisure travel.
Over the next few years,
lodging demand is expected
to continue to grow in Colo-
rado. There are, however, a sig-
nificant number of new hotel
projects expected to open to
the public, thereby outpacing
demand growth. This will then,
in turn, slightly decrease occu-
pancy percentages in the metro
area while actually boosting
the overall number of occupied
lodging space.
Of these projects that are
adding a total of 5,600 rooms
across the state in 2016, most
are located in the Denver metro
area, including the Millen-
nium Magnolia Hotel expan-
sion project, the Westin Denver
International Airport project,
the recently announced 1,500-
room Gaylord project near
Denver International Airport,
a Hyatt hotel and convention
center at Fitzsimons Village
campus in Aurora and the
Kimpton Hotel Downtown,
among others.
Another reason for the
increased demand for hotel
and lodging space, and one
that greatly influences the
industry, is the overall employ-
ment and population growth
of Colorado over the past few
years. As more people move to
a city or state and join the labor
force, they encourage friends
and family to visit, increasing
the volume of leisure travelers
to the state.
It also is hard to ignore the
impact that the marijuana
industry has had on Colora-
do’s overall economy, as well
as what it has done for the
travel industry. In just the
first year of legalization, Den-
ver International Airport saw
record traffic, the real estate
market has boomed and online
searches for “Denver hotels”
saw a rise of 25 percent. While
a direct correlation cannot be
established, this is one of Colo-
rado’s offerings that should not
be overlooked as something
that attracts leisure travel.
Thus far, 2015 has been a
good year for the hotel indus-
try, especially in Denver.
Expansion and growth have
been robust, as exemplified
by ADR, RevPAR, occupancy
rates and new construction.
Overall, as the economy con-
tinues to recover and grow,
demand continues to outpace
supply – a good sign for the
future of the hotel industry.
s
Dave Johnstone
Chief investment
officer of hospitality,
McWhinney, Denver
H
ospitality is going to
finish 2015with a con-
tinuation of improv-
ing metrics that metro Denver
has experienced over the last
five years. Additionally, CBRE’s
Hospitality research group, PKF,
is forecasting continued growth
for the next five years, but at a
slowing pace. With 70 brokers
exclusively working hospitality
investments across the country
and a dedicated debt and struc-
tured finance group for hospital-
ity, CBRE is looking forward to
2016 with both optimism and
caution.
n
Optimism.
Optimism
extends from a couple of trends
that became apparent in this
cycle. First and foremost, rev-
enue per available room, occu-
pancy and average daily rates
are forecast to steadily grow
over the next five years. For this
current year, the revenue per
available room for Denver will
show an increase of 9.9 percent.
Nationally, we are expecting
RevPAR to grow at a 7.2 per-
cent rate. Occupancy is expected
to remain fairly flat with only
nominal growth going forward.
The average daily rate is forecast
to grow 7.6 percent this year, but
gradually slow to a low of 2.5
percent in 2019. These metrics
have been running at twice our
long-run averages (1988-2014),
which is encouraging. The lodg-
ing industry is a function of both
national and local economic
growth. We are fortunate here
in Denver as tourism remains a
growth industry and, other than
the energy sector, all facets of
the local econ-
omy appear
to be stron-
ger than most
other parts of
the country.
S e c o n d ,
we are see-
ing lenders
rely on social
media sites
like TripAd-
visor. Actual
c u s t o m e r
f e e d b a c k
together with
the hotelier response is now a
part of underwriting a loan. This
is helpful for the hospitality sec-
tor in more remote locations like
tertiary markets or even small
resort communities, including
those like we have here in Colo-
rado.
Third, we are seeing the emer-
gence of nonregulated lenders
in the hospitality industry. These
new capital providers are able to
push leverage levels beyond the
traditional level of 50 to 65 per-
cent, going as high as 80 percent-
plus. Nonrecourse construction
financing also is available, albeit
with higher coupons. We expect
these sources to play an ever-
increasing role in our industry.
Finally, EB-5 financing had a
higher profile and its ability to
match job creation with capital
investment is maximized with
hospitality products. The time
that it takes to structure and
fund EB-5 investments is some-
what long, but it remains a cost-
effective method to raise non-
recourse capital. There may be
some changes
to this pro-
gram going
forward, so
we will be
mon i t or i ng
that situation
carefully.
n
Caution.
On the cau-
tion side of
our forecast,
we
expect
to see the
f o l l o w i n g
issues impact
hospitality. Permanent lenders
like we have in the commer-
cial mortgage-backed securities
arena will trend operating met-
rics, which dampens the impact
of a robust part of this cycle.
By going back and averaging in
2013 performance with 2014 and
this year, lenders are hedging
their valuations to the conserva-
tive side.
Second, the banking indus-
try is now coping with the new
regulatory environment created
by Basel III and Dodd Frank.
Issues such as new risk-based
capital standards, new liquid-
ity definitions and require-
ments plus revised definitions
of “core equity” have the poten-
tial to limit lending activities.
Although not fully implemented
or even understood, regulations
may have an earlier impact on
the hospitality industry vs. other
asset classes due to the perceived
volatility of this business.
The CMBS industry will short-
ly be hampered with some new
regulations that require a level
of personal liability for each
securitization. Regulation AB
will require executives to certify
that deal information supplied
to investors is accurate. As these
capital providers struggle with
a changing regulatory environ-
ment, credit spreads have wid-
ened out and much mystery
surrounds the Federal Reserve’s
handling of short-term interest
rates. Long-term rates will be
closely monitored as we move
into another election cycle.
Finally, on a national level
CBRE has seen an increase in
hospitality property sales where
the transactions fail to close for
various reasons. However, these
owners who fail to sell are find-
ing the commercial debt mar-
kets to be compelling alterna-
tives with low long-term rates,
higher values and aggressive
leverage levels, allowing some
to refinance and pull out tax-free
proceeds.
In summary, as the Denver
Post used to say, “Tis a pleasure
to live in Colorado.” Denver’s
economy remains strong as job
growth is matching the millenni-
al in-migration; tourism remains
strong; and local retail sales con-
tinue to expand. The Denver
hospitality industry benefits
from the infrastructure (conven-
tion center, Denver International
Airport and transit system) that
makes it the great city that for-
mer mayor Federico Peña envi-
sioned some 30 years ago. PKF
projects same store sales to grow
at a rate greater than 6 percent in
2016. This keeps metro Denver
in the upper echelon of 56 hospi-
tality markets in this study.
There are some storm clouds
on the horizon but, clearly,
metro Denver’s hospitality and
lodging industry is positioned
for an above-average runway.
With 42,681 hotel rooms and a
nice mix of upper-priced and
lower-priced brands, the sup-
ply demand equation remains at
equilibrium. There are 1,689 keys
under construction with another
4,000-plus or minus in the pipe-
line. Long-term construction to
permanent financing is not read-
ily available; however, both the
local banks and the debt funds
are aggressively seeking lending
opportunities. 2016 looks to be
another banner year for Den-
ver area financing opportunities
in the hospitality and lodging
industry.
s
Michael Cantwell
Executive vice
president, CBRE Debt
& Structured Finance,
Denver
David Treadwell
Vice president, CBRE
Debt & Structured
Finance, Denver
Colorado’s
RevPAR, which
is a more
telling statistic
for measuring
both ADR and
occupancy rates,
continues to
increase year after
year, and currently
sits at $81 per room,
which is nearly
$2 more than the
national average.
There are some
storm clouds
on the horizon
but, clearly,
metro Denver’s
hospitality and
lodging industry
is positioned
for an above-
average runway.
