Allen Brown Director, GRS | Title (480), hotel

Allen Brown
Director, GRS | Title
(480) 428-5575

The lodging sector of commercial real estate, which enjoyed a pretty strong run right after the recession, is finally cooling off. A lack of supply that the hotel industry faced for several years has been fulfilled in many areas, and now demand is starting to taper off for hotels, mostly as a result of macroeconomic factors.

Demand for hotel rooms is expected to increase 1.6 percent this year over 2015, which is exactly how much expected growth is forecast to take place, according to PwC. Next year is predicted to have more of a gap, with a 1.9-percent increase in supply, a 13.8-percent jump in new room starts, but only a one-percent rise in demand. Occupancy is forecast to remain flat this year and decrease by 0.9 percent in 2017. Hotels in both the upper-end and economy sectors could suffer the most, while independents and midscale venues are supposed to fare better.

Macroeconomic worries seem to be the main culprit for the slowdown. They include, among other factors, uncertainty about the coming president-elect’s policies, a slowdown in the growth of corporate profits, and concerns about Brexit and the overall international economy.

JLL points out that lodging cap rates are increasing as well. Cap rates through the third quarter were at 7.7 percent, up from 7.4 percent during the same period last year and are expected to slightly rise in 2017. Overall transactions are also down. In the first two quarters, sales were below the $6 billion quarterly average since 2010. But the third quarter was different, hitting $10.5 billion, largely because of the $5.5-billion purchase of Strategic Hotels & Resorts by China-based Anbang. So far this year, foreign investment in U.S. hospitality assets has account for 42 percent of overall transactions.

Revenue per available room (RevPAR) has also seen slower growth so far this year. Over the first three quarters, operators posted a 3.2-percent increase, down from 6.7 percent for the comparable period in 2015. Additionally, six of the top 25 U.S. markets — Boston, Chicago, Houston, Miami, New Orleans and New York City — experienced decreases.

In all likelihood this correction in the hotel sector is probably due to all of the new supply coming on the market, which was needed a few years back when the economy started to recover. Additionally, there are so many things that can impact hospitality, from airline ticket prices, to a change in seasonal weather patterns. Fortunately the current setbacks are pretty minor, and moderate growth will return to the hotel industry.