5 signs point to cycle’s grand finale in mid-2017
 
5 signs point to cycle’s grand finale in mid-2017
06 OCTOBER 2016 8:39 AM

Conference season provides invaluable insight to how the industry’s future is shaping up. One thing is clear: There are challenges and opportunities ahead.  

It was about as symbolic as anyone could have imagined.

The slow, light drizzle that fell over the desert amid the annual Lodging Conference fireworks show was surely a sign from the hotel gods. The industry’s seven-year up cycle clearly is slowing, but like those fireworks that boomed and popped high above the lawn of the Arizona Biltmore, it’s also clear that the show will go on.

The Lodging Conference capped a month of show-hopping that provided clarity to the current direction of the overall industry. In a word: fizzle.

I don’t prescribe to the falling-off-the-steep-cliff theory for this cycle (insert obligatory “unless there’s a black swan event” here). But the end of the cycle, which for purposes of this article is defined as revenue-per-available-room growth, is coming. Here are five takeaways from recent conferences that lead me to that conclusion.

1. RevPAR growth will stop in July 2017…
The U.S. hotel industry has experienced RevPAR growth for 78 consecutive months (through August). It will be 79 when September data is released in two weeks. That equals 7.25 years, which is the definition of a cycle in just about everyone’s book.

We’ll make it through the first quarter because this year’s slower-than-expected Q1 will make the comparisons in 2017 easier to manage. It’s unlikely the inevitable downturn will last only one month—as it did in August 1998 when, after growing for 80 consecutive months, RevPAR declined 0.4% (see chart below). That time, there were 31 more consecutive months of growth before the tech bubble popped it in April 2001, which was of course followed up by the cataclysmic drop after 9/11.

When—not if—year-over-year RevPAR growth is recorded in October, November will be the 81st consecutive month of positive performance. That will make this the longest streak in recorded history, and like all good things, it will come to an end.

2. …because rates will stagnate
There’s nothing more concerning in the hotel world than attending three conferences within a month (Hotel Data Conference, International Society of Hospitality Consultants annual conference and Lodging Conference) and hearing the same whispers: pricing power is waning. Average-daily-rate growth, which never really accelerated to expected levels during this cycle, is expected to slow to a crawl. Combined with supply growth that’s approaching 2% (that’s 2% of more than 5 million rooms!), the result isn’t promising.

July is prime leisure travel season and is always the busiest month of the year for the hotel industry (as evidenced by the record demand of nearly 117 million room nights sold in July 2016). Everyone in the industry knows how much leisure travelers look for deals, so by July 2017, some hoteliers will be looking to gain market share and sacrifice rate. The domino effect will lead to a decline in RevPAR.

3. Brands on the block
Most industry followers don’t believe merger-and-acquisition action is going to slow. With so many M&A deals taking shape during the last two years—including Marriott International’s recent closing of its acquisition of Starwood Hotels & Resorts—the climate is ripe for more consolidation.

There are plenty of companies that could be bought or sold, but my hunch is that it’ll be the brands that see the most movement. Despite what Marriott CEO Arne Sorenson says, a number of industry executives believe the company will shed some its 27 hotel brands. That could come in the form of melding two brands together or a complete sell-off of brands that don’t fit the portfolio.

This is pure speculation, but as I’ve previously written, I wonder if Choice Hotels International President & CEO Steve Joyce will convince his former employer (he worked at Marriott for more than 20 years) to sell him a brand that will help solidify the company’s expanding upscale footprint. Is Four Points that brand? Or Sheraton? Only time will tell.

I also wonder what China’s HNA Tourism Group has in store for Carlson Hospitality Group when that acquisition closes by year’s end. HNA also happens to own a 15% stake in Red Lion Hotels Corporation, which just last week closed on its acquisition of the 1,000-hotel Vantage Hospitality portfolio. Could HNA increase its stake in RLHC, and if so, what are the synergies between Carlson and Red Lion? Could the Radisson family of brands or Country Inns & Suites change hands?

The possibilities for mergers, acquisitions and initial public offerings around the globe are endless, which will make the next 18 months quite interesting. One thing is certain: there’s a new player on that world stage. Jim Abrahamson, CEO for Interstate Hotels & Resorts, told Lodging Conference attendees that he expects more influence from China. That’s valuable insight coming from an experienced executive whose company was sold this year by a partnership of Thayer Lodging and China’s Jin Jiang International Hotels to Kohlberg & Company.

4. The value peak was inevitable
Million-dollar-per-key sales were almost the norm in some markets during the past few years. That aggressive pricing can’t last forever, so it’s no surprise that most industry real-estate followers think the peak is past. The prevailing message: If you’re going to sell, now is the time to get serious about it.

While the bid-ask spread remains a fair distance apart, more owners are building their war chests to swoop in and acquire assets below peak values. Prism Hotels & Resorts just formed a $200-million partnership to do that. Driftwood Acquisition & Development, an affiliate of Driftwood Hospitality Management, is another one looking for deals. There are countless other companies in search of where to place their dry powder. Methinks the broker community is licking its chops at the prospects.

5. In a nutshell: A busy but wary industry
There are plenty of other emerging trends—including the resurrection of full-service hotels as acquisition targets and the ever-increasing role revenue management is taking in the C-suite—that will be front and center as we head into 2017. But for the moment, many eyes are on the industry’s resolve. Is the cash cow from the past seven years going to fizzle, or is there enough meat on the bones for it to continue to sizzle?

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1 Comment

  • Stephen Bethel October 6, 2016 10:03 AM Reply

    Hi Jeff:

    Thanks for your insights. This is supporting what we are starting to see at Frazier Capital Valuation regarding our hotel valuation practice nationwide. Transaction volume is falling, REVPAR is flattening out and in some markets is falling. Cap rates are at historic lows that are indicating really high values. All of this coupled with the PIP requirements of franchisors is leading to some strong headwinds ahead.

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