Colliers' hospitality leader shares his outlook for the transactions market

(Colliers International Head of Hospitality)

Bryan Younge, managing director valuation and advisory services, joined Colliers International in April to head the company’s newly formed National Valuation Hospitality and Leisure Group Practice, which focuses on portfolio valuations, financial reporting, tax services and litigation support. Here, he shares with HOTEL MANAGEMENT his perspective on the market volatility affecting hospitality this year as well as where he sees the market headed going forward.

1. To what do you attribute the deceleration in the transactions market?

There have been some major transactions in 2016, an example being Marriott and Starwood. But when you remove those outlier transactions, we’re going to see a pretty substantial deceleration in transactions. Interest rates are working their way up and people are preparing for cap rates to follow suit. There’s a lot of uncertainly as to what’s going to happen through the rest of this year; 2015 was a stellar year in [revenue per available room]. Occupancy was also up and stable. It was good, healthy growth at the end of 2015 and it looked to be a sustainable trend for a number of quarters. Now there’s about $200 billion in hotel-related maturities that will start coming down at the end of this year and 2017 and 2018 will be record years when loan maturities come due because of all the deals that were struck in 2007 at the peak of the market when interest rates and cap rates were low and the lending and acquisitions climate for all commercial [real estate investment trusts] and [commercial mortgage-backed securities] deals—especially in the hotel industry—were at a very strong level. There was also quite a bit of restructuring in 2010 and 2011 because of the Great Recession. New deals were also being struck with shorter-term maturities of five to seven years and many of those loans are also coming due starting next year.

2. How do you see a potential downturn in the market impacting the hotel industry?

We’ll see fewer transactions, which there have already been as a result of tightening credit. A lot of hotel companies will focus on existing assets rather than acquisition. We’ll see some consolidation in REITs and some companies. Capital will be redirected to the properties themselves, refocusing on training, property improvement plans and enhancing the overall guest experience in anticipation of a downturn so that they can remain maximally competitive. The more they contribute to the hotels now while they have cash flow, the better they’ll do if there’s a downturn and the capital isn’t there. It would be the first time in a long time that hotel ownership is pushing the brand standards or carry a lot of weight on their own in terms of lifting brand standards, rather than the franchisors themselves. In the past, franchisors required hotels perform [capital expenditures] every five years, whether the properties needed it and whether the market could support it. Those are control issues that have caused owners to jump from one brand to another because it’s expensive and not substantiated. But in certain cases, hotel owners are anticipating future positions and want a competitive edge. So they are increasing the quality of their hotels over and above the requirements of the brand.

3. Do you believe Airbnb is a contributor to the current state of the hotel market?

I think it’s a coincidence that there’s deceleration in the hotel industry at the same time that Airbnb is proliferating. It may not be the cause of deceleration in the market, but Airbnb has relieved compression in markets where occupancy is very strong during citywide conventions. Most of the impact from Airbnb is in markets where there are major tourism draws and visitation can be conducted by way of foot rather than by car. So while it’s not a major factor for hospitality, it’s somewhat of a fact—certainly not with suburban assets or upper-upscale properties. But it is an issue with lower-rated properties that are in downtown cores.

4. Where do hotel REITs fit into the current paradigm?

Along with decelerating transactional activity, we’ll see more reorganization of portfolios. I think the timing for the MGM and Hilton REITs is not a coincidence. We’re at the top of a market and establishing REIT entities has a number of tax shelter implications. So not only will we see more new REITs and consolidation of REITs, but we’ll also see reorganization at a number of different companies that will allow the businesses to hedge against a downturn in the economy. We may also see a spike in divestitures and some companies may get rid of hotels at a price that will attract small domestic, private companies that have cash. Fundamentals are being challenged. RevPAR growth could be on a steady path of decline; some think it’s a steady decline, some thing it’s a three-month flip because employment and gas prices are causing a disruption. But some think there will be positive RevPAR growth at the end of 2016 and that it’s very market specific. So if there were to be a downturn, it would compound an already apparent issue in tightening credit and REIT values would be challenged if that were to happen. But it would take a pretty substantial downturn to compromise REITs that are loaded with quality assets. But it will really depend on the specific REITs, the economy and even the next U.S. president. Uncertainty is also contributing to the holding pattern and the downturn in transactional volume.

5. Is there a silver lining?

Despite issues with interest rates, heavy credit and cap rates and the relatively strong supply growth that’s currently going on, we’re still seeing a relatively high level of demand in most markets and the presence of that demand has allowed a lot of upscale and upper-upscale properties to achieve occupancy levels in the mid to upper 70-percent range. We’re talking about many competitive sets of upscale and upper-upscale luxury hotels that are doing really well in terms of occupancy and that’s allowed them to press rate pretty well over the last several years. Now that there’s a relaxing in the demand trend, we’re seeing the average growth rate will probably subside. But I view the average rate of growth now as running on fumes and pushing the vehicle as far along as possible before it needs to stop and refuel. You might think of the refueling period as the downturn in the market. If and when a recession occurs, larger hotel markets with stronger occupancy levels and, for the most part, still improving average daily rates, should have better rate integrity. Most of these properties will be able to establish an average daily rate that should be healthy enough to sustain them for a pretty long period of time if there is a downturn, any relaxation in rates could be accompanied by a commensurate decrease in occupancy, but it would be mitigated by relatively low oil and gas prices. So travelers can benefit from low gas prices for leisure travel, for example. But as we know, low gas prices can also cause a disruption in the general corporate environment. So we may see a decrease in corporate travel in the next few years.