A bumpy U.S. economic recovery coupled with financial uncertainty is weighing on investor confidence levels, but there are some bright spots going into 2013.
REPORT FROM THE U.S.—A slow and choppy U.S. economic recovery coupled with more financial uncertainties is weighing on investor confidence levels. However, there are bright spots ahead for the economy that will positively affect the hotel industry, according to Jones Lang LaSalle research experts during a webinar Tuesday on the 2013 commercial real estate landscape.
Benjamin Breslau, managing director of Americas Research for JLL, said the “very slow and quite choppy U.S. economic recovery” is not a surprise coming off the financial crisis. And though experts speculated there’d be more clarity once the election was decided, Breslau said, “the election doesn’t clear the air of uncertainty in the marketplace.”
In fact, the U.S. is dealing with the looming fiscal cliff, long-term sustainable debt, the ongoing eurocrisis, sustainability of growth in emerging markets and unprecedented risk in financial markets, he said.
“It’s quite a bit of uncertainty weighing on confidence levels,” Breslau said.
The eurocisis, which has been “festering for two-and-a-half years since Greece came for its first bailout,” has taken a backseat in the press because of the fiscal cliff. “The fiscal cliff will be averted,” he said. The “eurocrisis might actually be the longer-term issue.”
With Greece teetering on the edge and Spain and Italy in the crosshairs, there are major structural problems in the political system and fiscal union in Europe.
“It could get worse before it gets better,” added John Sikaitis, senior VP and director of office research.
A roadmap for regulation
There is a roadmap for regulation with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Because a majority of the bill will be implemented in the marketplace soon, it will provide “financial companies and banks on what the future of business could look like,” Sikaitis said.
The uncertainty instead is framed around $16 trillion debt and trillion-dollar deficits. “Overall, spending has increased by 6.7%,” Sikaitis said. “We really need some overall reform around spending, taxes and entitlements, which account for 58 cents on the federal dollar.”
“To get past lukewarm recovery, we need direction from Washington on fiscal and political directions moving forward,” he said.
However, the weak and slow growth will continue until mid-2013, Breslau said. The policy issues, including the fiscal cliff, will leak into 2013, meaning it will take time for policy action to translate to business activity.
“If you’re an investor in real estate, how do you make decisions with your business or with your capital until you better understand the rules of the game? … Until those are clear, it will be relatively slow growth in 2013,” he said.
Sectors leading in growth are health care, technology and the housing segment—which is new on the scene. On the flip side, finance, manufacturing and the government segment will continue to lag.
“The positive news here is, first of all, we’re not predicting a recession. There will be slow growth but not a recession,” Breslau said. Banks are better capitalized, corporations are in excellent financial situation and the housing marketing is recovering. If “we’re able to clear some of these hurdles, growth could accelerate later in 2013” and early 2014, he said.
Hotel market outlook
Lauro Ferroni, director of research, said the hotel real-estate sector is gaining strength. The demand for hotel accommodations rose 3% because of more business travel, more conventions and more international tourist arrivals.
“Demand growth underpinned a healthy transactions market,” he said. The deal volume is holding steady this year at $15 billion, with New York, Chicago, Washington D.C., San Francisco and Miami leading as the top five transactions markets.
Hotel performance is a fundamental bright spot, Ferroni said. Jones Lang LaSalle Hotels forecasts that revenue-per-available-room growth is projected to be between 4% and 6% for 2013, but looking closer at city-by-city levels, “there will be winners and losers in 2013,” he said.
Gateway markets including Boston, Los Angeles, San Francisco, New York and Miami will lead the pack in demand growth, mainly because of international tourism arrivals. This will hold steady in 2013, he said.
However, “performance for Washington, D.C., is a wild card. Growth in D.C. lagged in 2013,” Ferroni said, adding that this is typical during an election year. Because of the inauguration and more travel to the city as private and public sectors strengthen ties with the government, this should pick up.
Cities that will lag because of high amounts of supply growth include Atlanta, Dallas, Phoenix and Florida cities Orlando and Tampa.
In 2013, a key trend is the gradual re-emergence of debt for hotel transactions, Ferroni said. “Debt levels will be at the highest levels next year since 2007, implying an ongoing gradual recovery in the debt market.”
Focusing on value-adds, private equity will be the most active buying group next year, he said, with an anticipated buying capacity of $45 billion over the next several years. Real estate investment trusts are the next most active group and will look for high-quality branded assets in urban markets.
Additionally, Ferroni said off-shore investors in China, Southeast Asia and the Middle East will be a strong presence in gateway cities.
“There will be ongoing strength for hotel transactions in 2013,” Ferroni said. “We expect the market for hotel deals and the pace of transactions to mirror the second half of 2012 instead of the first half,” because the second half of 2012 was more active.
“The positive trend will continue,” he said.