PwC: Lodging Sector Supply-Demand Trends Could Reverse in 2017

Hotel supply growth could increase next year from 1.6 percent to its 1.9 percent long-term average, said PwC, New York. 

Combined with decelerating demand growth, this could result in declining hotel occupancy–the first such decline in eight years, PwC said. Average daily room rate growth could slow commensurately, which would likely limit revenue per available room growth to just 1.7 percent, the smallest increase since the end of the recession.

PwC said “plateauing” corporate profit growth will likely shrink business travel hotel room demand. Other demand-side concerns including the strong U.S. dollar, Brexit and Eurozone economic weakness could all contribute to continued weakness in lodging sector demand, PwC said. 

“While global and domestic uncertainty related to the potential outcome of the U.S. presidential election has now receded, uncertainty is now focused around the economic and social policies of the new administration and the potential impact on the U.S. economy,” said PwC Principal Scott Berman. “These among other macroeconomic headwinds will be factors we will be closely watching as we approach 2017.”

PwC’s hotel sector outlook noted that after a “tepid” first half, real GDP increased 2.9 percent in the third quarter, driven by modest increases in consumer spending and stronger-than-expected exports. “[But] uncertainty, both international and domestic, continues to weigh on U.S. lodging industry performance,” the report said. 

Interest rates represent another uncertainty. But hotel investment prospects would remain “reasonably favorable” even if interest rates move upward, reported Cornell University’s Center for Hospitality Research, Ithaca, N.Y. The university examined the relationship between hotel cap rates and U.S. Treasury rates. 

“Hotel cap rates should respond more quickly to interest rate changes than those of other property types because hotels do not experience what’s called ‘lease friction,’ which we see in other commercial properties,” said Cornell Real Estate Professor Jack Corgel. He examined data from first-quarter 1997 through first-quarter 2016 to predict that a 100-basis-point increase in 10-year U.S. Treasury rates would produce a 28-basis-point hotel capitalization rate increase.

Many analysts expect the Federal Reserve will start to increase interest rates later this month, but Corgel called it “reasonable” to expect that any rate increases will come relatively slowly. “As a result, I believe that even as rates begin to change, hotel investors should have ample time to determine whether to exit their investments without fear of losing gains,” he said. “On the other hand, new investors will need to rely on the strong dividend flows currently being produced by hotels.”