This is what a downturn could look like next year

Photo credit: Pexels/energepic.com

A booming labor market and steady wage gains are helping to sustain consumer confidence in the United States and thereby driving hotel performance to new peaks, according to recent reports. But what can the industry expect if a downturn is on the horizon next year?

Here’s what we know now, according to Ten-X Commercial’s Quarterly Hotel Monitor:

  • Total hotel revenue in the U.S. topped $16 trillion in June, a new high.
  • Hotel deal volume reached $6 billion for a second consecutive quarter and is up 51 percent from the previous year.
  • Second-quarter gross-domestic-product growth in the U.S. reached 4.1 percent.
Related Story: Occupancy hits 30-year high in U.S.

Peter Muoio, executive VP and chief economist at Ten-X Commercial, noted that this economic expansion is now the second longest in U.S. history. In 2019, the up cycle will have lasted 10 years, double the average length of a U.S. expansion.

Mediterranean Resort & Hotel Real Estate Forum

Experience the Opportunities in Mediterranean Resort Investment | 17–19 October 2018

Join 300 of your industry peers at the 4th annual MR&H in Athens, Greece, to experience exclusive investment and development opportunities available in the Mediterranean.

“Many investors, lenders and operators in the commercial real estate industry are asking the question ‘what if,’ recognizing this longevity,” he said. “We started modeling the downturn in 2019-20 several years ago for this reason.”

While the firm noted there are no signs of imminent recession at the moment, the ingredients for its recipe are beginning to appear. Muoio said that rising interest rates, signs of budding inflation and the threat of trade wars have all increased the potential for a downturn. In turn, concerns are heightened, causing the investment community to start thinking about what the real-estate landscape would look like during a recession.

Related Story: What interest-rate hikes mean for the U.S. hotel industry

Ten-X’s recessionary model shows the following:

  • Occupancy will fall to 67 percent in 2019, and then recover to 69 percent in 2021. This would put the metric on par with 2013-14 levels.
  • Room rates will fall slightly in 2019 before contracting more than 5 percent in 2020. The metric will bounce back in 2021 with an increase of 3.5 percent.
  • Revenue per available room will average losses of 5.7 percent in 2019 and 2020, and then it will bounce back with over 6-percent growth in 2021.

The model shows that the recession will be short-lived, and Muoio said it’s important to differentiate it from the Great Recession.

“That was tied in with a financial crisis and a historic housing bust,” he said. “We do not think the ingredients are present for this sort of deep, prolonged downturn.”

A Look at Transactions

Meanwhile, a healthy industry calls for a growing stretch of hotel deals. During the second quarter, deal volume measured $9.2 billion, according to Ten-X. While that figure was down 14 percent from the previous quarter, it still was an increase of 18 percent from last year.

That decrease was mostly due to volume falling in the select-service segment, which declined more than 20 percent from the previous year, according to Ten-X. Full-service deal volume remained steady at $6.3 billion, however.

Related Story: 5 things shaping U.S. hotel investment

“Hotel transaction volume has indeed been very strong in the first half of this year, running about double the pace of the first half of last year,” Muoio said. “However, 2016 and 2017 were down years for hotel deal volume, with 2016 off the 2015 peak for this cycle by 28 percent and 2017 registering another 22-percent drop. The volume of the first half of 2018 is running at a nearly $40 billion annual rate, which is a fantastic activity level but still doesn’t beat the 2015 peak of over $50 billion.”

In a recessionary situation, he said deal volume would drop, as is historically the case.

“For the hotel segment, a fall-off in the order of 40 percent peak-to-trough could be expected in our downturn scenario,” Muoio said.

Related Story: JLL: U.S. deal pace up 93 percent over last year