U.S. hotel NOI faces stagnant outlook

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Despite strong post-recession recovery, growth in hotel occupancy and net operating income remain muted. That’s according to Trepp, which analyzed its database of consecutive year-end financials reported for more than 7,000 hotel commercial mortgage-backed securities loans across nine census divisions defined by the U.S. Census Bureau. The company is a provider of information, analytics and technology to the CMBS, commercial real estate and banking markets.

Trepp found that hotel occupancy averaged between 68 percent and 70 percent from 2004 to 2006, but, not surprisingly, the figure dipped in 2007 and 2008 when travel fell during the recession. Annual occupancy changes have been mostly positive since 2009, with average occupancy between 74 and 75 percent from 2014 through 2018. Extended-stay hotels were the occupancy winners, reaching the highest rate in any of the subtypes (77.55 percent) in 2018. By comparison, limited-service hotels’ occupancy reached 75.41 percent and full-service hotels notched occupancy of 74.34 percent.

In terms of NOI, Trepp noted that hotels saw fast growth in 2005 and 2006 to the tune of 8 to 10 percent. However, in 2008 and 2009, NOI fell 7.77 percent and 27.73 percent, respectively. Then, NOI growth reached a peak of 11.23 percent in 2011 before it slowed to 3.24 percent growth in 2013. In 2014, that growth rose to 9.25 percent.

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“While all commercial real estate sectors have been softening across the board, the slowdown has been particularly noticeable in lodging as the room for additional property enhancements have dwindled following years of strong momentum,” the researchers noted. The results: hotel NOI growth slowing to 0.29 percent in 2016 and 0.12 percent in 2017.

West Coast Wins

When examining the data further, researchers found that the Pacific U.S.—including Alaska, California, Hawaii, Oregon and Washington—led the NOI rankings from 2004 through 2017. Properties in this area recorded yearly NOI growth of 8.31 percent to 14.16 percent between 2010 and 2015. Trepp attributed that growth to the region’s warm climate, scenic landscapes and tech opportunities that make the area an attractive destination for both business and leisure travelers. The research showed that California and Washington, in particular, had some of the highest occupancy rates (averaging about 80 percent) among all the states in the U.S.

Trepp analysts noted that most of the regions recorded negative annual income changes in 2017. However, the Mountain region (Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah and Wyoming) and Southwest Central (Arkansas, Louisiana, Oklahoma and Texas) stood out with NOI increases of 5 to 6 percent. The reasoning? The Mountain region was boosted by improvements in Colorado and Arizona. The Southwest Central hospitality sector suffered in 2015 and 2016 but was then in high demand when Hurricane Harvey entered the scene in 2017.

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When drilling down deeper to the 20 largest metro areas in the U.S., Portland, Ore., was on top in terms of NOI growth from 2004 through 2017. San Francisco and Seattle followed. The lowest performer in terms of NOI growth was Virginia Beach-Norfolk, Va., which researchers attributed to the market’s budget-friendly inns in cities such as Williamsburg, Chesapeake and Gloucester. Additionally, Virginia’s hotel industry faced stagnancy due to federal sequestration and defense cutbacks in 2013 that caused reduced demand from government employees and the military.