Hospitality Trends – A National Perspective
By Russ Rivard
, MAI | March 26, 2019
While attending the Hunter Hotel Conference, a national hotel real estate and finance conference designed for hotel owners and investors, in Atlanta last week, hotel experts showed up in force to describe the state of the hotel industry and to project, as best they could, what to expect in 2019 and 2020. While most experts agreed that the economy is still strong, they also expressed that the best years of the recovery are now behind us. Others, while agreeing to that premise, were adamant to explain that there are still opportunities for varying players in the hotel industry to complete transactions and to be involved in deals in 2019 and 2020, and while we may see some declines going forward, we are starting from a very strong position.
The Federal Reserve just announced that it would not raise interest rates in 2019; thus, hoteliers working to obtain financing for their projects may enjoy this temporary reprieve of rate hikes. However, it is important to consider that the Fed also cut its growth forecasts to 2.1% for this year and 1.9% in 2020, indicating a slowing economy. Nevertheless, many participants still plan to complete deals in 2019 and 2020. Although every market is different, these projects should be well scrutinized and projected with a conservative view given the current conditions and near-term forecast. This article is meant to focus on national trends and briefly summarize some of the main points that were discussed at the Hunter Hotel Conference.
Bid vs. Ask
Many owners have held on to their properties through this long recovery period and enjoyed increasing cash flows and improved values over the last several years. Some of those owners that have waited to list their properties are now considering selling and are beginning to realize that there is a widening gap between the bid and ask. Although every asset has its own story, and every market is different, many buyers are taking into account the softening of the economy and, thus, are projecting declines in attainable revenue per available room (RevPAR) and values. The difference between the seller’s sales price and what a buyer is willing to offer should continue to pose challenges for hotel brokers in 2019 and 2020. This bid vs. ask gap can essentially be worked out in any deal; however, it takes reasonable considerations and assumptions from both sides.
Throughout the post-recession recovery, most hoteliers have experienced gains in occupancy given the increase in both leisure and business travel. Within the last six months, some markets have experienced a leveling-off in terms of occupancy, and in some cases, slight declines; however, according to industry leaders attending the Hunter Hotel Conference, occupancy levels should remain high for the next couple of years due to the strong demand for travel. According to the U.S. Travel Association, in 2017, total domestic and international inbound traveler spending in the U.S. generated a total of $2.4 trillion in economic output.
Barring any unforeseen national or international incident, any decline in demand should be minimal; therefore, demand should remain strong for the next couple of years.
New supply is an issue for all hotel investors and, of course, should be considered and projected through market studies. Although new supply additions in the U.S. have been relatively well absorbed over the last several years, there are certain markets that are facing oversupply issues, such as Minneapolis, which was essentially overbuilt in order to host the 2018 NFL Super Bowl, and NYC. On the other hand, there are some cities, such as Austin and Nashville, where demand remains very strong despite aggressive construction efforts over the last few years.
National construction costs have increased significantly over the last several years. The cost to build hotels (and other commercial projects) has continued to raise concerns for both lenders and the developers. The cost of materials and labor has increased during this recovery, outpacing inflation by a large degree. Another key factor that elevates construction costs and aggravates any new hotel construction project is time. A new hotel project today, which typically took about 18 months to complete several years ago, can now take up to three or more years to finish due to delays often associated with obtaining and keeping proper labor and materials. These delays prove costly and, quite often, force the developer to bring more equity to the deal or require the lender to underwrite the project with a different rate. Either way, the project becomes more expensive and can prove problematic to many hotel investors. Furthermore, many lenders are currently less interested in proposed hotel projects due to uncertainties related to both the buildout timeframe and the potential correction in the economy.
As 2019 enters its second quarter, many hotel owners, who have enjoyed strong demand and increases in average daily rate (ADR) over the last several years, now face demand levels that have either peaked or, in some cases, softened. Several large hotel brand leaders agreed that they are currently projecting anywhere from 0% to 3% annual RevPAR growth going forward. These assets benefit from the fact that they are often operated by experienced management companies and are also market leaders. Other single owner-operated hotels may not fare as well and may experience RevPAR declines in 2019 and 2020.
As the U.S. continues to experience record low unemployment, many hoteliers find themselves fighting for the same quality employees. As inflation increases and the labor market remains tight, this demand for good employees should continue resulting in higher wage pressure. These increases in labor costs often exceed the 2.5% to 3.0% expense growth that is typically projected and, thus, negatively affect a hotel’s net operating income (NOI). The top-tier hotels that are market leaders can often continue to absorb rising costs by adjusting their average rates. However, many hotel owners will find themselves unable to increase ADR levels because of their respective market positions, which may result in lower cash flows. This could present problems if hotel owners decide to refinance or sell their assets. For a hotel owner that has a well-leveraged property, this challenge can prove to be no more than a speed-bump than a situation that may require adding more capital, or worse, a quick sale.
The hospitality industry has proven, in the past, that it can withstand declines in key investment and operating parameters during an economic correction or slowdown. While attending the Hunter Hotel Conference, what was again abundantly made clear is that there will always be players within the industry that enjoy, and thus, are interested in, being involved in hotel projects, regardless of the headwinds. They realize that these challenges can be correctly considered (and accounted for) if they take the proper time and perform the adequate due diligence, inclusive of receiving a thorough market study, to understand where they are in the current cycle of the economy.
Strong Consumer Confidence Elevates Demand and Competition among Community Lenders
By Russ Rivard
| September 19, 2018
As the economy continues to gain steam, consumers are gaining more confidence and continue to seek investment opportunities. “In August 2018, consumer confidence increased to its highest level since October 2000, following a modest improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board, adding that “Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018. Overall, these historically high confidence levels should continue to support healthy consumer spending in the near term.” Positive consumer confidence is very good for lenders; however, the competition among lenders is another key determinant on whether banks make their goals for the year.
Smaller community banks may benefit from the fact that larger regional banks, which have been actively lending on hotels and other commercial real estate loans in recent years, are starting to reduce their lending due to their previous focus on specific property types or areas of concentration. This decline in lending at larger institutions will benefit smaller community banks. This benefit, however, may be minimal due to a vast amount of competition that is occurring among community banks and other institutional players.
Even though there appears to be no shortage of capital to finance hotels or other property transactions, banks face an increasingly aggressive lending market as institutional capital grows more active. This competition has been especially fierce in commercial and industrial lending. “The basic takeaway is very competitive conditions, especially for higher-quality C&I credit,” said Bryce Rowe, a senior equity research analyst covering community banks at Milwaukee-based Robert W. Baird & Co. Inc. He noted “Since the financial crisis, C&I has been the primary focus of banks, and it’s what you hear a lot of the community bankers focusing on in terms of where they want their growth and where they want their loan growth.” After a rough start to the year, REITs are seeing a comeback, as well. This additional availability of capital may continue to escalate competition, but it represents a positive opportunity for borrowers.
This competitive landscape and struggle among smaller lenders should prove positive for the borrower; however, only if the borrower has the right expectations. For example, if a potential borrower has inexperience or is expecting more leverage than the underwriting supports, the borrower may find a tougher road to gaining financing opportunities. Also, location still plays a factor, and some borrowers in secondary and tertiary markets may mistakenly expect similar debt to that in core markets. Overall, the current financial market and competition among lenders should benefit borrowers throughout the duration of 2018 and into 2019.