A handful of research analysts took the stage at the recent Lodging Conference and offered some industry perspective on everything from the current pace of new construction to transaction volume and asset values, as well as overall performance metrics.
JP Ford, SVP, Lodging Econometrics, provided the backdrop for a development update. “These are exciting times for our industry due in large part to a prolonged lodging development cycle,” he said.
Ford pointed out there are currently more than 5,000 projects and some 608,000 rooms under construction. He added the last time the industry approached such pipeline numbers was in the fourth quarter of 2008.
Ford also noted that the upscale and upper midscale segments account for some 70 percent of all new builds in the U.S. pipeline. “The brands in those chain scales are the clear favorites amongst developers,” he said.
Furthermore, when zeroing in on specific markets, Ford revealed that New York City has taken the lead with 181 projects underway followed by Houston with 148 projects. The cities of Dallas, Nashville, and Los Angeles round out the top five U.S. markets in terms of current projects with 143, 124 and 112 hotels, respectively.
According to Ford, by the end of the year some 112,000 new hotel rooms are expected to come online, which represents a 2.2 percent growth rate over the number of hotels open and operating by the end of 2016.
Meanwhile, Lodging Econometrics is forecasting a 2.5 percent growth rate in 2018 and 2019. Ford pointed out the expected opening of 135,000 rooms in 2019 is still below the new opening peak of 2008, which totaled 154,000 rooms. “So we’re in pretty good shape,” he added.
Meanwhile, Adam Lair, managing director, senior partner, HVS, detailed some of the transaction activity in 2017, which he characterized as flat year-over-year from 2016. He further added that the first three quarters of 2017 have seen a 2 percent decline in price per key and a one percent decline in total volume.
Lair talked about some of the challenges that helped define a notable decrease in transactions in 2016 from years prior. “CMBS had dried up; REITs and institutional capital had moved largely to the sidelines and we ended the year down 30 percent in total transactions. Those parties have returned to the market and helped to stabilize things, but they haven’t come back to the degree that we saw in 2014 and 2015,” he said.
When it comes to large transactions of $10 million and above, Lair noted the trends were similar with a 35 percent decline in 2016 and flat year-over-year figures. In addition, he observed declines of 4.4 percent in price per key and 2 percent total volume.
Ford, for his part, did observe “a surge in third quarter in hotel transactions with a reported selling price, along with a corresponding drop in the average price per room for hotels greater than 200 rooms.” In addition, he noted of the 101 transactions of hotels greater than 200 rooms in 2017 thus far 32 of them closed in the third quarter. Similarly, 202 of the 505 transactions for hotels with less than 200 rooms closed in 2017. “There were lots of sellers in Q3,” said Ford.
Lair talked about the market from an investor’s point of view and acknowledged there are a number of concerns going forward shaping future projections.
“Uncertainly about the market persists. It’s been a mature cycle and it’s been a long cycle. Investors are wary about where this goes from here. Underwriting continues to be conservative, you have a widening buy/sell gap and foreign capital has declined pretty significantly so far this year so that’s suppressing our transaction model for 2017,” he said.
Lair elaborated on what the company expects going forward. “We expect new supply to start coming on line and slowing RevPAR growth a little bit further to the degree that RevPAR growth over the next few years will really be dictated by moderate rate growth. As a result we expect hotel values to remain flat and stable through 2019,” he said.
Mark Woodworth, senior managing director, CBRE Hotels’ America Research, meanwhile, noted that 16 of the 60 U.S. cities the company covers are “predicted to have higher levels of income growth.”
Nevertheless, he acknowledged that from a hotel perspective, “Occupancy has clearly plateaued in the vast majority of markets, so we don’t see any big shifts in all but a handful,” he said, adding it will be “another okay year in terms of RevPAR” and that there will be “expansion in the vast majority of markets that we cover.”