Is new supply ‘the biggest disruptor coming our way?’

National Report – Now may be an ideal environment for hotel business, but what should exit strategies look like in five years?

Experts from HVS, RW Baird, PKF Hospitality Research and PwC agreed at Boston’s HELP conference in April that now is a good time to transact hotels. “We’re in the sweet spot; fundamentals are exactly where we want them to be,” said PKF-HR’s Mark Woodworth. Still, chinks in the armor do exist that will affect exit strategies moving forward.

For Anne Lloyd-Jones, managing director for HVS, that crack is supply. While the word around the industry for the past year has been that supply isn’t registering as much of a worry over the short term, Lloyd-Jones disagreed. “New supply is the biggest disruptor coming our way, and the biggest opportunity is to be on the right side of that supply,” she said.

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PwC Managing Director Warren Marr said he doesn’t see “a huge supply risk in the near term,” but qualified that with the caveat that all markets are local. RW Baird Managing Director David Loeb agreed: “The pipeline is like politics,” he said. “It’s all local. You have to watch individual markets very carefully.”

Lloyd-Jones contended that the driver behind looming supply is the money available today. “Supply is going to come faster than anyone believes possible,” she said. “There is money out there to do it, and the only things that will constrain it are space availability and brand availability.”

The other wild card attached to forecasting is the economy, and how hotel cap rates change with interest rates.

“The fact that we don’t know what’s going to happen with the economy is the real risk,” Marr said. “So many people came in at such low interest rates in the last few years, so even if rates do go up, it might not be to levels they were five or six years ago, and that can have a very meaningful impact on someone’s value on exit.”

Woodworth shared PKF-HR’s cap rate forecasting model. “We see the hotel risk spread really narrowing in about eight quarters from now,” he said. “That’s when hotels will be at their most attractive point, so think ahead to that time whether you’re a buyer or a seller.”

No matter what the future brings in terms of economic growth or decline, all panelists agreed that the best course of action is to ensure rates are optimized.

“Your rates today will make a huge difference if you’re looking to sell in five years,” Loeb cautioned. “If you can maintain your rates, you’re in a much better position to see your NOI continue to grow.”

➔ 97,739 rooms

According to STR, the number of guestrooms in construction in February 2014 was 31.9 percent more than in February 2013.

➔ -52.9 percent

But that 97,739 number is nearly 53 percent less than the number of rooms in construction in Q1 2008.

➔ 17.8 percent

The number of rooms in the final planning stage (pre-construction) is higher today than it was in Q1 2008.