Demand will continue to outpace supply in 2018, according to industry forecasters, but other factors—such as tighter financing markets and continued slow rate growth—will have an effect on performance and transactions trends.
LOS ANGELES—U.S. hotel performance in 2018 will be underscored by some bigger-picture trends—such as possible interest-rate hikes, a strong overall economy and tight financing markets—but the overall outlook shows continued high demand, according to industry forecasters who spoke at this week’s Americas Lodging Investment Summit.
What the numbers say
Carter Wilson, VP of consulting and analytics for HNN parent company STR, shared the company’s latest forecast, which predicts supply growth of 2% and demand growth of 2.3% in 2018 compared to 2017. The forecast also projects year-over-year occupancy growth of 0.3%, average-daily-rate growth of 2.4% and revenue-per-available-room growth of 2.7%.
“New supply is not really a concern, though I know in particular markets it can be,” Wilson said. “Overall, new construction is starting to turn down, and that’s a positive sign.”
While he said STR is “pretty bullish on demand growth for 2018,” Wilson added ADR growth is “pretty anemic, given how strong performance is on the demand side of the equation, but it will continue to grow.”
Mark Woodworth, senior managing director of CBRE Hotels, registered his surprise that despite 2017’s strong demand, “pricing hasn’t moved much.”
“2017 was the first time ever we saw an actual real decline in ADR during a period where there was not a recession,” he said.
Cindy Estis Green, CEO and co-founder of Kalibri Labs, shared some insights into the struggling rate scenario via Kalibri research, which shows how much online travel agents take of what used to be direct revenue on bookings.
“Rates (at hotels) are higher, but hoteliers just aren’t collecting it—third parties are,” she said. “Also, hotels are fixated on RevPAR index, which can sometimes push them to go for occupancy at the expense of rate.”
However, both Woodworth and Wilson said they’ve seen some pockets of optimism supporting more aggressive rate growth in certain markets and segments.
“Confidence is definitely an issue with rate,” Wilson said. “But just because rate overall is growing around 2% doesn’t mean all hotels are equal.”
He cited research that shows hotels in the top quartile of rate growth are managing to push rate by as much as 8%—and those typically tend to be economy hotels with around 100 rooms located in suburbs.
Woodworth said the effects of recent U.S. tax code changes might translate to higher ADRs.
“There’s a growing view that we’re getting ready for—or already in—a cycle within a cycle, a surge of six, nine or twelve months,” he said. “Since hotels are conceptually full, with (tax code changes and higher consumer spending), maybe some of those dollars will find their way to meetings and other travels, and we may see a nice surprise on the room rate side.”
Transient vs. group
The transient vs. group performance picture will come into focus this year, the forecasters agreed, especially as tax cuts lead to higher corporate confidence and profitability, allowing companies to loosen the reins on corporate travel.
On top of that, some pockets of regional group strength—for example, Wilson cited San Francisco’s Moscone Center coming back online in 2018—inspire general optimism about group performance this year, the panel agreed.
“There are some reasons to be bullish about group,” Wilson said. “It has a little more pricing power than transient … so there’s a little more pricing power there.”
However, continued stagnant transient rate growth continues to drag overall rate growth down, Wilson said.
“Transient has been the darling of the industry since 2012,” he said, but “transient rate is terrible; it’s anemic. It’s trending at or below inflation, which is a real challenge for profitability.”
Mark Wynne Smith, global CEO for JLL’s Hotels & Hospitality Group, said 2018 likely will end up with transaction volume near where it was in 2017, at around $24 billion in hotel transactions.
“Why isn’t it growing more? The answer is primarily in the financing market and also the difficulty of reinvesting,” he said. “There is generally less product around for that reason, so that’ll hold back the total volume.”
Single-asset transactions likely will dominate in 2018, he said, because fewer and fewer portfolios are trading.
On the financing side, Wynne Smith predicts “there will be compression of spreads this year, between 50 and 75 basis points,” along with “significant increase of capital going into debt funds.”
As for who will be doing the hotel buying, he said it will be mostly domestic buyers, thanks to the struggle offshore capital—particularly Asian capital—has getting into the country.
Wynne Smith said he has seen a positive impact of tax code reform already.
“The change in tone from November to January is very marked in my perception,” he said. “I can see there will be a more positive attitude to underwriting now. The one thing that doesn’t change though is lender caution toward financing new development. It’ll be some time before we see banks changing.”
Overall, though, Wynne Smith said he sees a new set of circumstances regarding buying hotel assets, in large part because of their scarcity.
“I would love to say we have plenty of assets to sell, but we don’t,” he said. “Anyone looking to invest has to be much more creative about how they’re going into the deal structure.”