Economic Outlook Benefiting Hotels
With the outlook for job creation and overall economic growth rising, demand drivers supporting hotels remain positive, reported Marcus & Millichap, Calabasas, Calif.
“While many investors anticipated a sector slowdown in 2017, the momentum carried through,” Marcus & Millichap National Hospitality Group Director Peter Nichols said in the firm’s hospitality sector report.
Nichols said lending liquidity has been “heightened,” but noted underwriting has generally been conservative, reducing risks of overleverage.
The hotel industry’s three key performance metrics remained positive in February, data firm STR said. In year-over-year terms, hotel occupancy rose 1.2 percent to 61.7 percent, the average daily rate rose 2.3 percent to $126.38 and revenue per available room rose 3.5 percent to $78.02.
“RevPAR has now increased year-over-year for 96 consecutive months–eight years in a row,” STR Senior Vice President of Lodging Insights Jan Freitag said. “That is far longer than the upswing after 9/11, but not yet as long as the positive RevPAR run in the mid-90s.” He said both healthy occupancy and average daily rate gains led to RevPAR increases.
Overall, 18 of the 25 largest U.S. markets reported year-over-year RevPAR growth in February, led by Minneapolis/St. Paul due to Super Bowl tourism. Miami/Hialeah, Fla., posted the month’s second-highest rise.
Looking at hotel transaction prices, STR and Hotel Brokers International found a 12 percent drop in investment price per room, or the sale price plus expected capital expenditures. The firms’ Hotel Transaction Almanac tracked more than $20 billion in hotel transactions. It found the average total investment per room declined more than $30,000 to $240,000 from the record $272,000 average established in 2016. This represented the lowest total investment price per room since 2013.
The lower price point resulted from a different mix of hotel assets sold rather than a decrease in hotel values, STR Consultant Hannah Smith said. “Portfolio transactions were a key factor in the decline, as properties sold within a portfolio represented 21 percent of all of the hotels sold last year. Portfolios tend not to include many upper upscale or luxury hotels.”
Smith also noted a lower concentration of hotel transactions in the 25 largest markets, where properties generally sell at higher price points. After accounting for more than half of all hotel sales in 2016, the top 25 markets represented just 37 percent of sales in 2017.
Although price paid per room decreased, the amount of additional capital infused into hotels following acquisition rose significantly to $37,000, the almanac said–the highest level of additional capital per room since 2012 and the second-highest since 2000.
“We expect hotel values to remain at an all-time high in 2018, despite a rise in interest rates,” Smith said. “Capitalization rates, however, will likely increase again this year, as occupancy has peaked in many major markets and rate growth has become sluggish. With all that said, transaction volume is mostly expected to be a continuation of 2017.”
