At NYU, industry forecasts point to long-term profits

Sam Chandan, associate dean of NYUSPS Schack Institute of Real Estate, moderated the "Statistically Speaking" session, featuring research and consultation specialists Amanda W. Hite, president and CEO of STR and Stephen Rushmore, Jr., president and CEO of HVS. Photo credit: NYUSPS/Mark McQueen

NEW YORK — With the lodging cycle’s peak lasting longer than usual, hotel investors are understandably anxious about where they should put their money, and are eager for advice from research and consultation specialists.

At the NYU International Hospitality Industry Investment Conference, held this week at the Times Square Marriott Marquis, leaders from two consulting firms shared their insights on where the industry is going in both the short-term and farther out, with plenty of cautious optimism.

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Patience is Key

The last decade have been good for value-appreciation in hospitality-related investments, said Stephen Rushmore, Jr., president and CEO of HVS, and it’s still a good time to invest in hotels—but not if you plan to flip the asset quickly. “You need to be prepared to hold for a hotel and invest in it for eight to 10 years,” he said. Over the last 40 years, there has never been a period of eight to 10 years where the industry has not seen an internal rate of return that matches the market rate. “So holding on to your asset for eight to 10 years is clearly the best way to mitigate risk at any point of time in the cycle,” he said.

Due to increasing development and land costs, Rushmore expects supply to slow down over the next few years. Cap rates are also an area of concern, he added. “Expect those to increase moderately with increased interest rates. RevPAR will increase in most markets, but that increase will not be enough to offset a weakened NOI due to higher labor costs and property taxes.” In the 65 markets surveyed for HVS’ Hotel Valuation Index, Rushmore expects values to remain stable for now. “There’s not going to be any sort of significant appreciation or decrease in value in any of those 65 markets,” he said.

Rushmore did add one point of consideration: “If you want to see value appreciation, don’t expect it to come from the market. You will have to get that value appreciation from the asset itself.”  

Breaking Records

At the conference, STR and Tourism Economics presented a revised forecast for the U.S. hotel industry, predicting record-breaking performance levels through 2019.

“RevPAR growth exceeded expectations during the first quarter of the year and lifted our projections for 2018 as a whole,” Amanda Hite, STR’s president and CEO, said in the report. “However, because of the post-hurricane demand boost in 2017, we expect year-over-year occupancy declines during Q4 that will extend into 2019 with that year’s total overall performance affected.”

“Regardless, industry fundamentals continue at record levels supported by strong demand from both the business and leisure sectors. Solid economic indicators and a room construction total that represents just 3.6 percent of existing supply certainly help marketplace conditions as well.”

The expansion cycle has been fueled by high demand and low supply, Hite told the attendees, noting supply growth of just 1 percent from March 2010 to the present, while demand grew by 3.4 percent. At the same time, RevPAR grew 5.9 percent during the same period.

But the numbers aren't entirely positive: The U.S. pipeline reported its first decline in in-construction projects since the recovery of the Global Financial Crisis began. Last year, 190 projects were in construction, while 186 are underway for this year. The decline, Hite noted, has been running for four months.

The Next Two Years

For 2018 in total, STR expects that the U.S. hotel industry will report a 0.4-percent increase in occupancy to 66.2 percent, a 2.5-percent rise in ADR to $129.74 and a 2.9-percent lift in RevPAR to $85.89. RevPAR grew at least 3.0 percent for each year from 2010 to 2017.

The luxury chain scale segment is likely to report the largest increases in occupancy (+0.9 percent), ADR (+2.9 percent) and RevPAR (+3.8 percent). While all segments should report increases for 2018, STR expects to see the lowest rate of RevPAR growth in the upscale segment (+1.8 percent).

STR expects all but one Top 25 Market (Houston, Texas) to report RevPAR growth for the year. While most markets are projected in the 0 percent to +5.0 percent range, Minneapolis/St. Paul, Minnesota-Wisconsin, is the only U.S. Top 25 Market expected to see growth in the range of +5 percent and +10 percent.

For 2019, STR and Tourism Economics project the U.S. hotel industry to report a 0.1-percent increase in occupancy to 66.2 percent, a 2.3 percent lift in ADR to $132.74 and a 2.4 percent rise in RevPAR to $87.93.

The highest overall rate of RevPAR growth is expected in the upper-upscale segment (+2.3 percent), while the lowest is projected among Upscale (+1.9 percent) and Midscale (+1.9 percent) chains.  

Different from 2018, Minneapolis is the lone Top 25 Market projected to report a negative RevPAR percent change for the year. The remaining 24 markets are expected to post growth between 0 percent and 5 percent.

Risk, Reward and Inbound Investment

After meeting with owners and developers from less-developed economies, Rushmore said that he now believed that the U.S. has the best risk-reward ratio when it comes to investing in hospitality. “The challenges that hotel investors face in less-developed economies are much more significant and extreme than we face here in the U.S.,” he said. For example, South Africa recently passed a bill that allows the government to confiscate land from white landowners without any compensation or due process, and Cape Town is poised to run out of water next year.

Looking ahead, Rushmore predicts that as investors in less-developed economies gain experience in backing hotels, they will apply that knowledge outward and invest internationally. “We can anticipate an increasing level of people investing foreign capital coming into the U.S.,” he said. “And that can only be good for us.”