Experts at the 2017 Americas Lodging Investment Summit shared their insights on how the hotel industry will fare through the year.
LOS ANGELES—Hoteliers can expect growth in 2017, but perhaps not as much as they’d like.
That was a recurring message at the 2017 Americas Lodging Investment Summit that was hit home during the first day’s “Standing by the numbers” presentation.
Here are some of the key takeaways from what experts are projecting for 2017 and what they learned from 2016:
1. Slow and steady
Jan Freitag, SVP of lodging insights for Hotel News Now’s parent company STR, said the broad prediction for U.S. hotels in 2017 is 2.5% growth for revenue per available room, which will be largely fueled by rate growth as the company expects a minor decline in occupancy for the year. A similar trend is expected in 2018, when STR expects RevPAR to increase 2.9%.
While both years’ projections are down from the strong growth of recent years and even the 3.2% of 2016, Freitag said it’s important to put those numbers in context.
“It’s not great. It’s not bad. It is sort of OK,” he said. “But last year was average.”
Growth is expected to be a bit more robust north of the border, with 3.8% RevPAR growth expected in Canada for 2017 in terms of Canadian dollars and 2.9% projected for 2018.*
2. Look for more REIT activity
Lodging real estate investment trusts largely spent 2016 on the sidelines, but don’t expect that to remain the case in 2017, said HVS’ senior managing director Suzanne Mellen.
“In 2017, REITs have recaptured over 80% of their asset value, according to the Dow Industrial Lodging REIT Index,” she said. “We think with Hilton’s spinoff (Park Hotels & Resorts) and some consolidation, REIT activity should increase.”
There are several other factors that will impact transaction pricing and the overall marketplace in 2017, including the amount of international investment, which should continue but at “reduced levels” compared to 2016.
Supply will also play into pricing, Mellen noted.
“Limited-service, midscale through upper upscale select-service hotels will probably experience the highest rise in cap rates due to the threat of new supply that is kind of creating a gap in buyer and seller expectations,” she said. “We think there’s some potential that on the full-service and luxury side that high quality assets might actually see cap rates declining, as we expect there might be more competition for these kind of assets due to their higher barriers to entry, and hopefully higher activity by REITs, this year.”
She also noted that interest rates are trending upwards for 2017 and have increased 80 basis points since the presidential election.
HVS is projecting modest gains in asset values for hotels through the year and for the number of transactions overall to be roughly the same as 2016, with more spending weighted toward higher-end assets.
3. Supply will eclipse demand
Experts agreed that 2017 will be the year that the supply-demand dynamics turn unfavorable for the hotel industry, which seems to be the motivator for relatively modest revenue growth projections.
CBRE Research’s senior managing director Mark Woodworth said his company examined each of the markets that are exceeding the long-run average of 2%, which is set to jump from 21 to 46 markets. He said that affects CBRE’s forecast.
“You do see a meaningful RevPAR premium in those markets that aren’t going through high levels of supply growth,” he said.
According to STR data, pipeline numbers saw a noticeable increase in 2016, with the number of projects in construction up 30% and under contract hotels up 21%.
Freitag also touched on how supply from Airbnb may or may not be impacting hotel performance, showing a slight decline in compression nights for some key markets.
4. Demand lags optimism
Stock market jumps show a clear rise in investor optimism following the election of President Donald Trump, but the experts seemed tempered in their expectations for demand growth.
Freitag said there are a number of factors that play into that. STR projected 1.7% demand growth for the year.
“We always look at personal wage growth,” he said. “We’re looking at the strength or weakness of the U.S. dollar. We think that has a huge impact on tourists. (We also look at) private domestic investment ... and, obviously, unemployment.”*
Woodworth agreed with looking at those factors.
“Particularly with high-end chain scales, income growth is going to be critical and unemployment is going to affect the lower-priced scales,” he said.
5. The power of outliers
Woodworth said there is a stark difference between performance in most U.S. markets and some of the more noteworthy struggling markets, such as New York City, Miami and Houston. He said that’s even true in their analysis of markets with more than 2% supply growth.
“When you take out those three markets … you go from looking at (RevPAR growth) of 2.3% to 4.6%,” he said. “You can see the consequence on those aggregate numbers from just those three cities.”
Prior to the conference, STR shared data through November that showed RevPAR had increased 3.3% year-to-date in the U.S. with those three markets factored in; excluding those markets, RevPAR was up 3.9%.
Clarification, 27 January 2017: This story has been changed to clarify RevPAR growth projections are in Canadian dollars and to remove an incorrect reference to gross domestic product.