Why hotel owners may have to wait to see real asset returns

NEW YORK — At the NYU International Hospitality Industry Investment Conference, the heads of two industry consulting firms shared their predictions for the future of the industry.

The Value of Patience

“If you’re going to be an investor in the hospitality industry right now, and you’re looking to get value appreciation from the market, you are going to need to be patient,” Stephen Rushmore, president and CEO of HVS, said. “You’re probably going to have to wait eight to 10 years before the market is going to give you any sort of meaningful value appreciation for your asset, in large part throughout the U.S.”  
The median holding period for an asset is 5.5 years, he said, so the only other alternative based on where the industry is in the cycle right now is to create value from the asset itself. “I recognize that’s not an easy thing to do,” he said. 
For many markets throughout the U.S., HVS is forecasting values to be stable through at least 2019. “There are a number of forces at play here that impact value,” Rushmore said, noting that the recent changes in Washington and in state governments can have a big impact on hotel values. “Government forces can influence taxation, interest rates and policy to influence construction costs,” he said. “We have no idea the impact that the current administration will have on all these governmental forces. It can send values in other directions. But if you isolate out those government forces, and you take a look at all the other forces that influence value, values will remain stable.” 
Supply is another major factor. “The good news is that it’s not going to be disruptive in many markets throughout the U.S.,” he said. “Supply is being absorbed. We’re also seeing new-build financing becoming increasingly difficult, and we’re also seeing entrepreneurial incentives...declining about 100 basis points each year over the last several years, making it less attractive to build. So the good news is that supply is not going to have a real disruptive impact on hotel values in the U.S.” 

Top Markets

While most markets throughout the country will remain stable, some will be more affected by inbound supply than others, including Denver; Portland, Ore., and Seattle. “The supply coming into those markets won’t be fully absorbed,” Rushmore said. 
Markets likely to underperform in the coming years have traditionally been the “less sexy” markets to invest in, he continued—the tertiary markets where there hasn’t been a lot of interest in supply over the last several years, including Cleveland, Wilmington and Houston, which has struggled with the recent oil crisis.

New York, New York

And then there’s New York City with its “robust” supply pipeline. “Because of all that new supply coming into the market, and the existing supply in place, it will be more important than ever...to differentiate your assets,” Rushmore said, noting the “homogeneous” customer experience in New York City’s hotels. “If you have a hotel that you describe as boutique, millennial, trendy— you are not unique. You are not differentiated,” he said. “With the abundance of hotels out there, you really need to do that.”
Notably, Rushmore predicted that New York City’s supply would transition from full-service to select-service over the next few years. “Most of the supply in 2017 is going to be full-service hotels, 2018 will be mix of full-service and select-service, and 2019 will be mostly select-service,” he said.
Incoming supply is having an impact on rates, he added, and HVS does not expect RevPAR in New York to fully recover until 2020 when the supply pipeline starts to thin out.
“New York will continue to be very attractive to international buyers, because the price per room is substantially lower than markets like Hong Kong and London,” Rushmore said. “In Hong Kong, the average price per room being sold is over $1 million per key. In New York, that is very much the exception.” Cap rates for alternative assets in Hong Kong like retail and office space are low, he said, so investors are looking for alternative plays. “New York is very much on their radar, and I would expect that if corporate taxation rates drop—which it’s probably going to do with the current administration—that’s going to make New York even more attractive to international investors.” 

STR Predicts Modest Growth

For the 12 months ending in April, U.S. hotels saw just over 3 percent RevPAR growth. “That’s good, average healthy RevPAR growth for the U.S.,” Amanda Hite, STR’s president and CEO, told the audience. 
Room supply is growing at 1.7 percent, she said—which could be a mixed blessing. “The 1.9-percent demand growth doesn’t really make us super excited, obviously, but it’s still record demand, and I think in a period of uncertainty like we’re in today when you can’t get super excited about incredible growth numbers, you have to remember we’re selling more rooms than we ever have before.”
The month of April saw U.S. hotels set another record as well. “We sold over 103 million room nights, more than any other April before since we started tracking data in 1989.” 
Looking at the long-term supply and demand growth, Hite said, the supply growth number is creeping up closer to the demand growth. “We will see those lines intersect this year and we will end the year with supply growth outpacing demand growth.”

But for all that, STR is not concerned about revenue changes—for now. “We’ve been monitoring the number of submarkets with negative RevPAR growth,” Hite said. “For April year-to-date, we have 22 percent of our 639 submarkets with negative RevPAR growth.” That’s not too bad, she noted, considering that at this time last year, 26 percent of the submarkets were facing negative growth. 
But should those numbers grow, the industry as a whole could be in for a bumpy ride. In 1989 and 2008, years with serious economic downturns, a high percentage of submarkets with negative RevPAR growth brought down the country’s overall numbers. “We don’t see us being there in 2017,” Hite said. “We're watching the submarket numbers, but with only 22 percent having negative RevPAR growth, we feel pretty positive about the rest of the year and moving into 2018.” 

What's ahead for the rest of 2017...

For total-year 2017, STR predicts the U.S. hotel industry to report a 0.3 percent decrease in occupancy to 65.3 percent, a 2.5-percent rise in ADR to $127.13 and a 2.2-percent increase in RevPAR to $82.98. RevPAR grew more than 3 percent for each year from 2010 to 2016.
None of the seven chain scale segments is projected to report a year-over-year increase in occupancy. The Independent segment is likely to report the largest increases in ADR (+2.8 percent) and RevPAR (+2.7 percent). The lowest rate of overall performance growth is expected in the upscale segment (RevPAR +0.9 percent).
A full 19 of the top 25 markets are expected to post flat or growing RevPAR for the full year. While most markets will likely see an increase between 0 percent and 5 percent, Seattle, Washington, is the only U.S. market expected to record growth in the range of 5 percent and 10 percent. 

...and 2018

For 2018, STR and Tourism Economics project the U.S. hotel industry to report a 0.2 percent decrease in occupancy to 65.1 percent but increases in ADR (+2.7 percent to $130.59) and RevPAR (+2.5 percent to $85.07). The upper-upscale segment is expected to see flat occupancy—the only chain scale segment not expected to report a decrease in the metric. The luxury segment is projected to report the largest increases in ADR (+2.9 percent) and RevPAR (+2.8 percent).
All top 25 markets, with the exception of Boston, Massachusetts, and Miami/Hialeah, Florida, are likely to see RevPAR performance between 0 percent and +5 percent. Each of those two markets is projected between 0 percent and -5 percent in RevPAR.