Hotel Sector Expansion Slows
Hotel occupancy and room rates still sustain healthy revenue per available room, but the sector’s expansion is slowing, reported Auction.com, Irvine, Calif. And some investors took notice.
“Supply and demand in the hospitality sector is playing out the way we’ve anticipated, and we continue to expect increases in occupancy over the next several years, regardless of the step back seen during the second quarter,” said Auction.com Chief Economist Peter Muoio. “As expected, the supply pipeline remains moderate but increasing, while expansion appears to be shifting into a slower-growth phase.”
Muoio projected that hotel occupancy could reach 73.7 percent between now and 2018 as room rate growth simmers down to a still-healthy mid-3 percent range. As a result, RevPAR growth could average 4.7 percent through 2018. Room rates continued to rise in the second quarter, increasing a seasonally adjusted 1.6 percent and pushing average daily rates 4.8 percent above year-ago levels. Though room sales fell on a seasonally adjusted basis for the first time since mid-2012, they remain 2.7 percent above last year’s level. The drop in room sales pulled industry revenue down 2.2 percent from the first quarter, but they remain 2.7 percent above one year ago.
Although demand continued to outpace new supply in the second quarter, hospitality demand and supply curves came closer toward balance, Auction.com reported. The U.S. room count increased 1.1 percent year-over-year, compared to an average 1.7 percent increase since 1990. The West and Southeast regions hosted vibrant hospitality markets thanks to their stronger local economies, while the Midwest and Southwest saw more muted gains, Auction.com said. Oil prices continue to act as a drag in certain markets such as Houston, where a robust supply pipeline is just now coming to market. New York City and Washington, D.C., also face very large supply additions in the coming years and could see dips in international tourism if the dollar remains stronger than foreign currencies.
Meanwhile, hotel stocks decreased 1.4 percent in July, financial services firm Baird and STR reported. “Hotel stocks declined for the fifth consecutive month as sentiment toward the sector has turned quite negative,” said David Loeb, senior hotel research analyst and managing director at Baird, Milwaukee. Loeb said second-quarter hotel earnings generally remained ahead of expectations but RevPAR growth for some segments disappointed investors. “Additionally, third-quarter guidance reflects expected tough comparisons due to a few holiday shifts and weaker convention calendars across the country, which also surprised investors and added to the stocks’ recent weakness,” he said.
But Loeb said domestic hotel fundamentals remain solid and that he sees a large disconnect between current valuations and still-strong top- and bottom-line growth projections. Randy Smith, chairman and co-founder of STR, Hendersonville, Tenn., said the hotel industry continues to perform at record levels across the board, “so it has been surprising to watch this type of trend develop over the last several months,” he said. “There have been worldwide economic and political factors that have influenced investor sentiment, but with 18-month forecasts calling for further performance increases, we remain confident about the state of the hotel industry.”