A panel of hotel owners and operators at ALIS said 2018 is shaping up to be a year of strong performance and demand.
LOS ANGELES—Largely on the backs of tax reform, the overall 2018 outlook for the U.S. hotel industry is good, according to speakers at this week’s Americas Lodging Investment Summit.
“As an owner, the more money we make, the more satisfied we are,” said Mark Brugger, CEO of real estate investment trust DiamondRock Hospitality. “In 2017, there was a lot more uncertainty than there is going into 2018. … It seems like there are less variables now than in the same place a year ago.”
Managing around variables like a soft business transient environment in 2017 was critical for DiamondRock, Brugger said, and some last-minute group business helped fill gaps.
Going into 2018 with tax reform and “a couple quarters of very solid GDP growth” is encouraging, he said, but “while the indicators feel good, until we see it in the data period over period, it’s hard to get overly enthusiastic.”
Mike Barnello, president and CEO of LaSalle Hotel Properties, echoed that optimistic-yet-tempered outlook: “A lot of things look good and better than they did a year ago: GDP outlooks are good, corporate profits are good, everyone feels good at the moment, but it’s still TBD.”
The operators on the panel—Crescent Hotels & Resorts President and CEO Michael George and Aimbridge Hospitality President and CEO Dave Johnson—agreed that from a performance side, the U.S. hotel industry is in a good place.
George said he feels “a ramped-up intensity,” and his company’s ownership group by and large subscribes to the theory that the industry is in fact in a new cycle. “They feel the correction has occurred,” he said. “We’ve weathered it and are into a new period.”
“There’s still more opportunity for rate efficiency, commission efficiency, operating efficiencies, but we’re in a good place and just need to maximize on it now,” he said.
Johnson pointed out that the strength of the leisure segment is driving revenue per available room growth.
In general, RevPAR growth—while it may no longer be at 6% to 7%—is steady and gives owners and operators optimism, he said.
While many in the industry are lamenting the weakness of corporate travel, particularly on the rate side, Johnson said he’s seen indicators in his company’s portfolio performance that make him optimistic.
“We blew it out of the water (with group) in December,” he said. “Corporations were holding back, but they’re spending money now. We’re seeing our rates are up dramatically. You have to have the courage to price that. I’m really bullish on the group segment coming back in a big way.”
Impact of tax reform
The results of U.S. tax code reform could play a big role in that optimism, the panelists said, though they warned against too much optimism.
George and Johnson said for their businesses, the implied demand increases will be net positive.
“It’s all good. It’s just that simple,” George said. “It’s motivating group. It’s motivating social functions at properties. We’re seeing lots of activity around meetings and social events and rewards and recognitions.”
Johnson acknowledged that while he and everyone else still is trying to figure out exactly what the effects will be, “everybody agrees it’s positive for the economy and positive for the industry.”
“I focus on overall macro demand,” he said. “We’re a consumer-driven economy and consumer confidence is everything.”
Still, Barnello cautioned that hoteliers shouldn’t necessarily be 100% unbridled in their optimism that tax cuts will lead to a huge demand boost.
“We look at it, and it’s hard to argue with it, but when you put the pieces together, a tax change of this magnitude hasn’t been done often, and every other time it’s been done, unemployment has been north of 7%. And we’re at around 4%,” he said.
He said the real result of tax reform will depend on just how much corporations reinvest in their structure.
“The concern we have is that if you want to build something, you still need people to do it, and at the same time, we have a country that’s maybe not so open to immigration,” Barnello said. “People who don’t have jobs may not want jobs, so you’re swapping people around in different businesses.”
“The optimism’s there; I just don’t know how it all translates into the demand that a lot of folks are already counting on,” he said.
Brugger said that at the end of the day, corporate confidence (and increased spending) benefits real estate companies.
“As a real estate industry, we should be pretty bullish about the consequences of tax reform,” he said.
What’s still uncertain, the panelists said, is the impact tax reform may have on hotel transactions.
“It’s baffling to me that when the tax reform legislation was signed into law, I heard feedback it would be positive for transactions, but I’ve heard more complaints now than in years past about the lack of investment opportunities,” George said. “So while there’s always a certain amount (of assets for sale), the quality of them seems to be more limited. There’s a lack of motivation on the seller side. We’re not really sure if that dynamic is going to change anytime soon.”
The volume of good assets available for sale may be lower than in past periods, but the panelists agreed franchise growth isn’t slowing down anytime soon.
While unit growth for big franchise companies can be a positive, speakers said brand proliferation and potential oversupply also can have a negative effect on the industry.
“We read in the trades about how our friends in the brand business are selling record levels of franchises, and it’s scary from an operator perspective,” George said. “My expectation is that they’re going to have a great year this year and next; and I anticipate a lot of licensing deals executed, and a great deal of new supply coming in 2018 and 2019.”
Johnson said he believes bigger brands are better, but dilution can be an issue.
“I’m rooting for the brands to get bigger because they’ve lost distribution, and that has hurt owners,” he said. “From a brand perspective, I think bigger is better, but there’s too many brands. We work in the industry every day, and I can’t tell you what brand is part of Hilton and what brand is part of Starwood.”
Barnello said growth and scale are good, but scalability is key.
“Scale does mean a lot,” he said. “But on a hard asset side—on the side of the owners—we seek a different level of scalability. We own the Westin Copley Place (in Boston), and Host (Hotels & Resorts) owns the (Boston Marriott Copley Place). They’re both managed by the same management company. If we were to own both, there’s no scalability.”