Marriott's third quarter tells me that the brand growth hotel investors keep hearing about is coming more and more from buildings that already exist. In today's cost environment, the best hotel opportunities are repositionings of standing assets, not new construction, and the largest hotel company in the world is quietly confirming it. The owners who do well over the next few years will be the ones holding the right existing building, not the ones breaking ground.
Hotel Dive reported on November 2 that Marriott's global revenue per available room rose 6.5% year over year in the quarter, with the US and Canada up 7.4% and international markets up 4.4%, helped by both higher rates and higher occupancy. The company lifted its full year RevPAR growth outlook to 4.5% to 5%. Chief executive Anthony Capuano called travel demand "remarkably robust" and credited the World Cup in June and July with part of the lift.
The mix underneath matters more than the headline. In the US and Canada, leisure RevPAR rose 9%, group 7% and business transient 5%, while luxury and resort hotels gained 12%. On development, the pipeline grew more than 6% to a record of about 634,000 rooms, Marriott added roughly 20,100 rooms in the quarter for 4.6% net rooms growth, and conversions of existing hotels made up more than a third of signings and more than 40% of openings.
Two simple calculations put that in perspective. First, at the third quarter pace, the pipeline equals about 31.5 quarters of openings, which is 634,000 rooms divided by 20,100, or close to eight years of supply waiting in line. Second, if more than 40% of openings were conversions, then at least about 8,000 of the 20,100 rooms that opened, which is 20,100 times 0.4, were hotels that already stood and simply changed flags. The pipeline is the long promise. Conversions are the part that shows up on the income statement this year.
That fits what I see in deals. At EMC Acquisitions we invest in real estate and hotels in more than 15 countries, and when we look at an existing hotel the first question is whether a new flag and a targeted renovation will lift rates by more than the added fees and brand standards cost. Last week I wrote that buyers paid about $460,000 a key for a fully renovated InterContinental in Miami because they wanted to skip the capital spending. A conversion is the same logic from the other side: the building is there, the land is paid for, and the brand brings distribution and a loyalty base that Marriott now puts at about 309 million members.
I would still read the segment numbers with care. Luxury and resort RevPAR grew 12% against 5% for business transient in the US and Canada, so the top of the market grew about 2.4 times as fast, which is 12 divided by 5. That is a demand base concentrated in wealthier leisure travelers, and part of this quarter came from a one time sporting event. Underwriting a conversion on luxury growth rates without stress testing a slower year would be a mistake.
For the brands, conversions are close to ideal growth: fee income with no construction risk. For owners, the trade is only worth it when the flag earns back its cost in rate and occupancy. My advice to anyone buying hotels right now is to treat Marriott's pipeline as a signal about where capital is hesitant, and to look hardest at well located existing buildings that need a better brand rather than a new foundation.