Looking for signs of the next downturn
14 OCTOBER 2015 6:06 AM
With as many predictions about the end of the cycle as there are hoteliers, some industry experts discuss what signs they see of the future.
PHOENIX—In the hotel industry’s current cycle, with its record-breaking growth, strong fundamental metrics and sky-high transaction values, there’s one question on everyone’s mind: When will it end?
While no one knows the definitive answer to that question, speakers at The Lodging Conference shared some thoughts on the state of the industry and what signs point to the cycle’s eventual end.
Looking at outside indicators
Bernard Siegel, principal at KSL Capital Partners, said he overheard an hotelier say at the conference that the industry was in a “golden age.”
“There are reasons for us to be happy in this business,” he said. “There are reasons to enjoy these conditions. The fundamentals are strong, stronger than many of us have seen, stronger than in any of our years. There are reasons for us to be characterizing this as the golden age. We may look back on this that way.”
The industry has 50 years of data, he said, and cycles average seven-and-a-half to eight years. Siegel pointed out other indicators that hoteliers would be naïve to ignore, citing decelerating growth and revenue per available room, coupled with accelerating supply. On top of that, the industry has been benefiting from the low cost of debt and equity, which won’t last forever.
“At this point, there are no quivers left, so I think there’s reason for us to be talking about these things,” he said.
The American hotel cycle lasts about seven to 10 years, said Joel Ross, principal at Citadel Realty Advisors, and the industry is in its seventh year of the current cycle. The cycle is going to turn, he said, because it always does.
He cited indicators from the International Monetary Fund chairman saying the world economy is slowing down, and he also pointed to slower U.S. jobs and wage growth.
“I really think ’15 is the peak,” Ross said. “It’s not going to crash. It’s not going to be another ’08. But if you buy something today, you’re going to own it for three to seven years.”
Ross said currency struggles in China, along with recessionary conditions in Japan and Canada, are further indicators that the U.S. is nearing the end of its cycle.
“If you think none of that matters here, you’re kidding yourself,” Ross said.
He advised hoteliers investing in assets today to assume that “something is going to happen.”
“When doing projections, do your own, not what appraisers (think),” he said. “Stress-test it, (anticipate) RevPAR down 10% … see the capital structure and make sure it can withstand a black swan event.”
Can lending discipline hold?
The industry can’t continue on its current pace of 7% to 8% RevPAR growth every year, said Colin Carroll, VP of investments for Ashford Hospitality, but that may not be a bad thing.
“There’s nothing wrong with 3% to 6% growth,” he said. “We have a slower GDP period. We hit peak supply. There’s nothing wrong with a slower RevPAR period.”
Balance sheet lender discipline is holding for now, said Scott Andrews, senior managing director for the Hotel Group of GE Capital, franchise finance. His company continues to remain diligent on underwriting, he said, and it’s looking at the impact of new supply coming to the market.
“To me, that’s encouraging as a lender,” he said, referring to the aforementioned discipline. “Our strategy is to partner with operators. We love talking to operators who want to put 65% leverage.”
Siegel agreed with Andrews, saying he hasn’t seen a loss in discipline. He said debt yields seemed to be the primary underwriting threshold, and that discipline seems to be intact.
Carroll said he’s also seen more discipline lately, but as the market gets more competitive, standards will start to fall.
Something similar happened in the early 1990s, Ross said. Someone comes up with a new form of financing, and it’s disciplined. Then Wall Street adds pressure to ease up to “make the pool bigger, make more loans and get bigger bonuses,” he said.
“Somewhere down the road, we’re already seeing it,” he predicted. “The discipline will go away. We’ll be where we were.”