Situs Insights from ALIS 2017

The Americas Lodging Investment Summit (ALIS) conference was held last week where Situs and other CRE experts evaluated the year to come in the Hospitality sector, as well as CRE as a whole. Some of our insights include:

MARKET PERFORMANCE

• Following a record 2015, which experienced a 6.2% increase in RevPAR, 2016 ended the year with RevPAR growth of 3.2%. Forecasts by CBRE, reflect slower RevPAR growth of 2.9% in 2017 and 2.8% in 2018, respectively. The slowing growth is a reflection of the acceleration of supply in many major markets, and with it, a slight erosion of occupancy accompanied by moderating ADR growth. 2018, will represent the first year in over decade when supply will out-pace demand.

2015 2016 2017F 2108F
Occupancy 65.4% 65.3% 65.0% 64.9%
Occupancy Change 1.6% -0.1% -0.4% -0.2%
ADR Change 4.5% 3.3% 3.3% 3.0%
RevPAR Change 6.2% 3.2% 2.9% 2.8%
Source: CBRE Hotels

• Cities expected to experience the strong supply growth in 2017 include Austin, Charlotte, New York, Houston and Dallas.

• Cities expected to experience the lowest supply growth include: Hartford, Oakland, Richmond Albuquerque and Tucson.

• Cities expected to experience the strongest RevPAR growth in 2017, include Sacramento, Washington, D.C. (positive impact of inauguration), Tucson, Chicago, Salt Lake City and Albuquerque.

• Conversely, cities expected to experience the highest declines in RevPAR in 2017 include: Cleveland (Republican Convention in 2016), Miami, Houston, New York and Ft. Lauderdale.

BROAD MARKET TRENDS TO LOOK OUT FOR

• LODGING SUPPLY: The new lodging supply pipeline, especially in 2018 remains a concern. STR expects room supply growth of 2.0% in 2017 and 2.2% in 2018. Most ALIS attendees expect President Trump to ease lending regulations making financing more readily available for new development, further complicating the supply and demand equilibrium.

• CONTINUED INCREASES IN CAPITAL EXPENDITURES: In 2016, an estimated $6.6 billion was spent on hotel cap ex of approximately $1,350/key. The increase in spending is being driven by the following:
o Strong profits by property owners over the past few years.
o Need to comply with brand standards.
o Meet the needs of millennials with respect to design elements.
o Technology innovations.

• INCREASE IN CAP RATES AND MORTGAGE INTEREST RATES: Cap rates expected to increase modestly by approximately 30 basis points fueled by (i) increased interest rates, (ii) slowing RevPAR growth.

• REBOUND OF REITS AND PRIVATE EQUITY GROUPS: Expect REITs and Private equity groups to be active in hotel acquisitions in 2017. Nevertheless, REIT managers expressed some concern over the new administration’s potential tax reform policies which may adversely impact the tax benefits of REITs.

• CAPITAL FLOWS: Concern of continued capital flows from China, which has been the engine of much hotel investment in the United States and Europe. Increasing restrictions by the Chinese government on capital outflows could adversely impact hotel acquisitions and development in U.S.

• M&A ACTIVITY: Marriott’s acquisition of Starwood in 2016 represented a generational opportunity. Expect to see further consolidation especially among regional brands and the possible acquisition of such global brands as IHG.

• NEW DEVELOPMENT OPPORTUNITIES: Developers are looking more closely at secondary downtown locations, college towns, and communities that have unique demand drivers. Interest continues to shift away from gateway cities.

• LIFESTYLE AND “SOFT” BRANDS: Expect further introduction of lifestyle and “soft” brands targeted at millennials and independent hotel operators looking for the benefits of a lodging chains reservation and distribution systems. Hilton just introduced “Tapestry” a three-star soft brand targeted at hotels between 10 and 100 rooms.

• ALL INCLUSIVE SEGMENT: Look for major U.S. brands to venture into the all-inclusive lodging space, a market traditionally dominated by Spanish, Dominican, French, Mexican and Jamaican hotel companies.