Although there’s still growing supply and interest rates with which to contend, the new administration should ease labor and lending regulations to the benefit of the hotel industry.
It should be clear by now that everything is about to change dramatically on 20 January. Leaving aside all of the issues related to foreign policy and major domestic issues, there are many things that will affect hotels.
First, whatever you think of President-elect Donald Trump himself, his cabinet is superb. They are all guys who have had extremely successful careers, and know how to make deals and how to make things happen quickly despite bureaucratic inertia.
There will be a huge rollback of many of the absurd left-wing regulations, and there will not be any further push for a $15 minimum wage. The whole overtime regulation is now dead, which will save hotels a lot of money. Wasteful nonsense like handicap pool lifts and similar money-wasting rules and lawyer-feeding opportunities will go away. All of this is very good for cash flow of hotels.
More importantly, there is already a clear new optimism across the country with consumers having a whole new attitude for the better. Other than the entrenched left, the rest of the country feels that for the first time in eight years, there really is hope for positive change. We see the proof in retail numbers and consumer polling. This bodes well for travel and willingness to spend more on vacations. More importantly, as business feels the same optimism, and if real tax reform and regulatory reform happen quickly, there will be much more commercial travel as corporations start to gear up for faster growth, and as they have much more cash from tax reform to spend on building their businesses and raising wages.
The Democrats have already stated they intend to declare war on any real reform, but it will happen despite their obstructionist attempts. Republicans are prepared to use the same tactics the Democrats used to shove through Obamacare to get tax reform and regulatory reform shoved through quickly. Whatever your politics, the Republican sweep, not only in D.C. but throughout the country in state and local elections, is the best thing to happen for hotels in a decade. Business and banking will no longer be the evildoers of the left and the press, but will be recognized as the only way to grow the economy, which has muddled along for eight years. The selections for key cabinet positions will actually make things happen for the good.
So it is likely that now revenue per available room and, much more importantly, cash flow will have a chance to grow again on a real basis, and not just as a bounce back from the crash, which is all that has really been happening over the past eight years. I am reversing my view that the downturn in occupancy of the past year will continue.
So now the reality check. With Sen. Elizabeth Warren and the far left sidelined for the next eight years, banks will again be freed to make loans. Most important, community banks will be freed up as Dodd Frank gets major revisions. Local banks have been crushed by Dodd Frank, and so it has been very hard for many developers to get loans to build new hotels. This will change during 2017.
Great for developers, bad for existing owners. If you thought the new supply was not as bad as it could have been, get ready for a lot more new supply to come on line in 2019 and 2020 as banks gear up for construction loans again. It will take time to change Dodd Frank due to a war against it by Warren and her cohort of anti-business, anti-bank senators. It will get nasty, but in the end, Dodd Frank will be revised and banks—especially local banks—will be back in business.
Hotel values in 2016 have been the only real estate sector to have declining values throughout the year. Depending on whose index you use, values on average are down by 6.6% to 10%. These are real numbers compiled by credible, professional analytic firms outside the hotel industry who do not have the usual hotel industry bias and agenda to overstate the numbers on the positive side. This decline is continuing. Interest rates are rising and will continue to do so. This generally drives down equity values. New supply will be happening faster in two to three years. This will be a brake on RevPAR growth over the next three to five years, which is already artificially high.
For smart investors, it will be hard to see where the necessary upside is in hotel investment. It will need to be a value-add situation to entice longer-term investors. At the lower end of the value spectrum, it is likely buyers will still exist, and will overpay, due to a lack of sophistication and understanding of wider forces beyond their narrow local purview. They will be encouraged by the usual pundits at the Americas Lodging Investment Summit and other people doing puff articles. As we have seen, these people have been substantially wrong for the past two years, so there is no reason to expect that to change.
While a much better economy and far less wasteful regulation will help cash flow, these good news events will be offset by faster supply growth and higher interest rates. It will be interesting to see whether the negatives or the positives move faster. Selling now instead of in two to three years when rates might be much higher, and values will be hit with faster supply growth, is probably the better strategy. If you are just in it for cash flow and you do not have a loan maturing in the next few years, then holding and getting better cash flow is probably the right strategy.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry. Ross also was a founder of Market Street Investors, a brownfield land development company. A member of Urban Land Institute, Ross conceived and co-authored with PricewaterhouseCoopers The Hotel Mortgage Performance Report. Ross served two tours in Vietnam with the U.S. Navy.
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