Trump effect notwithstanding, hospitality prognosticator rethinks 2017

(Desk bell)

Better-than-expected fourth quarter numbers and an initial post-election bump in consumer spending are two reasons some hospitality consultancies are revising their guidance up for 2017.

Count PwC, and its hospitality and leisure practice leader, Scott Berman, as one. In its January "Hospitality Direction U.S.," PwC referred to the fourth quarter of 2016 as "encouraging" resulting in a "better-than-expected RevPAR increase of 3.2 percent."

One thing is sure, the Donald Trump presidency is anything but predictable, which makes it difficult for investors—foreign and domestic—to make assurable deals. Just 30 days in, the whimsical Trump presidency is anything but easy to read. 

So in its January note, when PwC writes, "Looking ahead, earlier concerns related to economic and political uncertainty appear to have moderated," well, how can you be sure when a Trump presidency seemingly moves so fast and loose?

Still, while President Trump's temperament vacillates on the impulse of a tweet and he oftentimes seems more interested in belittling the media than anything else, some have suspected that Republicans have not admonished him, but rather strategically kept quiet, in favor of using the president as a decoy to get their legislative agenda through Congress; to wit, as PwC points out: "Passing legislation toward lower taxes, reduced regulations and updated trade policies, [all] expected to contribute to improving economic conditions, surging capital markets, and increasing business and consumer confidence."

A propitious combination for a strong hospitality and travel industry. "These economic conditions are expected to support growth in corporate transient demand, which was uneven throughout 2016," PwC further wrote. 

Supply Stress

Still, there are demand/supply worries. Most of the reporting consultancies predict that 2017 will be the first year in some time where demand will outpace supply, which has been slow to get back to historical levels post the economic tumult of the late 2000s. 

"On balance, increase in the supply of hotel rooms is expected to outpace demand growth, resulting in a marginal decline in occupancy levels to 65.3 percent. Aided by an expected increase in corporate transient demand, growth in average daily rate is expected to drive a RevPAR increase of 2.3 percent," PwC writes.

When we sat down with Berman during the Americas Lodging Investment Summit (ALIS), he, too, voiced concern about billowing supply. "It's a worry," he said. In fact, "that RevPAR number would be higher if not for new supply coming online," he added. 

Nowadays, new supply isn't reserved for just traditional hotels; not while there is the unyielding home-sharing phenomena.

"Home-sharing is one piece of it," Berman said, and its leading to less compression nights in major cities, namely New York. And while The Big Apple's hotel industry has had a tough go of it of late, Q4 gave it hope. 

In PwC's "Q4 Manhattan Lodging Index," it wrote: "After three quarters of decline, Manhattan hotels finally experienced a positive, albeit tepid, increase in RevPAR of 0.5 percent in the fourth quarter."

Still, for the full year, RevPAR fell 2.3 percent, a second consecutive year of declining performance. In Berman's estimation, New York's difficulties are as much a function of its biggest sector, financial, as the likes of new supply and Airbnb. 

"Part of New York's issue is that the financial services sector has been in a malaise. Banks haven’t been making money and their segment as a demand driver has impacted corporate transient demand," Berman said.

That all is changing—if you believe in the direction of bank stocks over the past month. They have soared in post-election days on Trump promises such as rolling back Dodd-Frank. 

"The genuine consensus is that New York City swagger has been tested. This bump with banks being healthier is coming back," Berman said.

A Foreign Affair

Still, New York remains the biggest target for foreign direct investment, particularly capital coming out of China. According to a January survey taken among members of the Association of Foreign Investors in Real Estate (AFIRE), which was founded in 1988 and currently has nearly 200 members representing 22 countries, 95 percent of respondents said they will maintain or increase their investment in the U.S. Market specific, New York City is in its seventh year as the number one U.S. city among foreign investors and is in its third year as top global city.

But doubt remains. “As uncertainty rises with a new government in Washington and interest rates that have risen dramatically, it is no surprise that investors have signaled a note of caution,” said James A. Fetgatter, CEO of AFIRE. “Previous, comfortable spreads between cap rates and interest rates have narrowed making the investment criteria more selective and difficult. Increased market research and discipline will be required.”