By: Frank J. Nardozza, Partner, National Hospitality Industry Director, Summer 1996

Fast paced change in the lodging industry requires a constant look to the future to identify new business opportunities. Big profits have been made in recent years by those with the foresight to anticipate and capitalize on trends in their early stages of development. Extended-stay, all suites hotels, REITs, loan securitization, multi-brand franchisers, vulture funds, consolidations, technological innovation - these recent trends have meant big opportunity for savvy business leaders. But what about the future? What will be the next wave of opportunity in the lodging industry?

In this article, we will explore a variety of current and future industry trends, focusing on those that may trigger new ideas for innovation in the lodging industry. We hope you will find these perspectives useful, insightful and helpful in identifying future business opportunities.

What trends will be most influential in shaping the near-term future of the lodging industry.

The following factor, I believe, will have tremendous influence on the lodging industry in the near term and may be the foundation for innovation and future business opportunities.

Aging “Baby Boomers” - The baby boom generation represents approximately 78 million individuals who, sometime within the next decade, will move into the “over 50” age category. Just about every major U.S. industry, has focused on this trend. For example, the housing and health care industries have developed real estate products, such as retirement lifestyle communities vacation home communities, empty-nester communities and assisted care facilities targeting both active and non-active seniors. While some hotel chains have geared marketing campaigns toward the aging baby boomers, the lodging industry has yet to create a brand segment to this group.

Institutionalization of Hotel Ownership - The buying binge that has been occurring recently in the lodging industry has left large concentrations of hotel assets in the hands of relatively few major portfolio investors. Several new industry giants have emerged with portfolios valued well in excess of $1 billion. This new breed of owners consists of large, well capitalized hotel companies, REITs, pension funds, and investment funds. These entities are developing sophisticated asset management capabilities and expertise in capital markets and financial management. They are also expanding uses of technology and bringing “real estate” business savvy to investment decision - making. The “bigger is better” philosophy has taken hold as a result of the desires to diversify risk rap economies of scale, and achieve overall lower costs of capital. Further consolidation will continue, and innovative service providers and deal makers can reap significant benefits by meeting the capital and service needs of these of these new giants.

Globalization of Business - Globalization of businesses and economies is a trend that has taken hold in the 1990s and will continue for many years to come. With this trend comes increased international travel and corporate desires to expand globally and create worldwide brand identities. many countries now embrace the concepts of democracy and free enterprise and welcome foreign investment. These conditions bode well for increased cross-border investments and global expansion in the lodging industry. Concentrating on hugely underdeveloped consumer and travel markets, such as Latin America, Southeast Asia, and China could mean big opportunities for hotel investors and hotel chains seeking opportunities for brand expansion.

New Developments in Telecommunications and Technology - The age of “the net” is upon us. Sweeping changes are occurring in telecommunication technology and regulation. Mainline businesses and consumers are logging on en masse to the internet. These developments have significant implications for the lodging industry, both positive and negative. On the negative side, desktop video conferencing is becoming a realty which, in theory, could reduce the need for out-of-town business meetings. On the positive side, hotel companies can use the Internet to reach consumers more directly - effectively by-passing travel trade intermediaries. This could deepen the “brand lock” hotel companies now have on consumers. Use of the Internet - and technology in general - is a must for hotel companies wanting to stay ahead of the competition and realize big profit gains.

Shifting Economic Cycle - Is it time to buy or sell hotels? This question is being asked by both Wall Street and Main Street. Hotel occupancies and room rates throughout the U.S. are reaching all time highs. Property values within most lodging segments are coming closer in sync with property replacement costs. Institutional portfolio investors are buying properties competitively, using cheap sources of capital. Economists cannot agree on whether inflation or recession is lurking around the corner. After experiencing four solid years of recovery, the growth cycle in the lodging industry is likely to flatten over the next two years, or even dip a bit beyond that - depending on what happens with new construction and interest rates. The story of big gains through property turnaround may be over for the near term, and high-yield investors will likely get out of hotel investments. Investors looking for more stable and predictable returns, particularly large institutional investors, will continue to buy hotels. Tax reform could also affect the current cycle, depending on what happens with capital gains rates and the ‘flat tax’ proposal.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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