Increasing supply growth affecting hotel values, pricing

Staybridge

Hotel brokers from across the industry expect the transaction market across the country to remain healthy throughout 2016, though a slowdown is imminent and the effects of increasing supply are beginning to be felt.

“We’ve had consistent growth for years but we are starting to see a slight dip in 2016,” said Ed James, principal at the Mumford Company. “We do expect volume to remain strong in the short term but perhaps not quite as strong as 2014 and 2015. The fundamentals still look very good at the property level.”

James said his firm brokered 43 hotels in 2015 and anticipates brokering 45 this year.

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Andrew Broad, co-president and partner at Hotel Assets LLC, said the company brokered 85 hotels in 2015 and expects about the same number of transactions going forward into 2016.

Lamberville House Hotel

“This might be a bit of an oddball year since things are coming through now that have been under contract for some time,” Broad said. “We might get hit with a bit of a lag in the third and fourth quarter, but it’s basically the recession that never happened. We all thought we were coming into some kind of a slowdown in January but that just didn’t happen.”

The transaction market continues to be active and is seeing a higher prevalence of single-asset transactions, said Teague Hunter, president of Hunter Hotel Advisors. They brokered 82 hotels in 2015 but anticipate fewer this year, likely around 60.

“We continue to see an active transaction market as [private equity] firms and [real estate investment trusts] are selectively paring their portfolios and moving forward with the disposition of noncore assets,” he said. “The difference from the past few years has been the absence of large portfolio trades. In 2016, there has been a higher prevalence of single-asset transactions.”

Supply Ramifications

H. Brandt Niehaus, president of Huff, Niehaus & Associates, said the record low amount of new supply the past few years has allowed operating numbers to grow without interference from new supply, which dilutes the market most of the time.

He said Nashville has been one of the exceptions and prices have been doing quite well there. 

“Even after an abundance of new rooms in downtown Nashville, the RevPAR climbed significantly from 2014 to 2015 and again from 2015 to 2016,” he said. “As long as RevPAR continues to grow, the effect will be minimal or in selective markets.”

He said most of the new construction is in metro locations, where the first signs of slowing occupancy growth and decrease in RevPAR growth are going to occur. 2018 will be when the new supply will have a bigger impact on operating numbers, which will in turn affect hotel values and pricing.

In particular, one of the effects of this supply shift may be the price-per-room patterns, James said. The price peaked in mid-2015 and is down just slightly into the second quarter of 2016, he said, and he doesn’t predict significant pricing declines for the next two quarters.

Brokers said muted new supply additions helped support higher per-unit transaction pricing over the past two years and helped lead sales prices to multiyear highs in 2014 and 2015.

“The lack of supply growth and healthy appetites for hotels over the past few years obviously led to attractive pricing,” Hunter said. “The strong operating fundamentals exhibited across the hotel sector were not diluted by the supply growth we are observing now.”

Peter Nichols, the national director of Marcus & Millichap’s national hospitality group, said the recession of the late 2000s left impacts still being felt today.

“In 2011, the U.S. hotel industry was in its first full year of recovery. Most hotel owners were only beginning to rebuild property performance and were dependent on occupancy gains, rather than rate growth, to driver higher RevPARs,” Nichols said.

Hot Properties

The brands and segments that could face the most growth moving forward in 2016 continue to be midmarket select-service properties with the most popular brands coming from the Hilton, Marriott, Starwood and IHG families, James said.

“The pickup in new supply additions happened as a result of greater access to new construction financing and the continuation of strong property-level operating results both actually realized and forecasted for U.S. markets,” James said.

Premium select-service seems to be the segment of choice to gain traction because those assets can be managed more efficiently, Hunter said.

Sanctuary hotel lobby

Broad expects the Houston and New York City areas to be the most affected by lower transaction prices through the rest of the year due to New York being saturated with supply and Houston being affected by a plummet in the oil and gas industry.

Looking ahead to 2017, solid transaction volume should run at or just slightly below where it is now, James said, and the supply additions are likely to slow temporarily as the market experiences a cooling-off period.

Broad expects cap rates to increase slightly going into 2017—those owners who continue to experience revenue growth will see increases in value—and those owners who are stagnant on the revenue side will likely see some value erosion.

The transactions will plateau in 2017 in terms of both volume and pricing, but any fluctuation in interest rates and availability of debt could lead to more of a bear market on hotel assets, Hunter said.

“I think the transaction market is going to be really good over the next few years, as long as we don’t have anything catastrophic happen like we did in 2008 when everything crashed,” Broad said. “I think it looks pretty healthy overall.”

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