Hotels Buck Larger CRE Trends

The hotel sector registered record-breaking performance last year and hotel cap rates are bucking larger trends by remaining stable as interest rates rise, said STR and Marcus & Millichap.

Compared to 2017, hotel occupancy rose 0.5 percent to 66.2 percent, average daily rates increased 2.4 percent to $129.83 and revenue per available room jumped 2.9 percent to $85.96. STR President and CEO Amanda Hite said the absolute values in those three key performance metrics were the highest she has seen. The sector also set records for supply with more than 1.9 billion room nights available and demand with nearly 1.3 billion room nights sold. Based on percentage growth for the year, demand (up 2.5 percent) outpaced supply (up 2.0 percent), Hite said.

“Operating most of the year in a pretty favorable macroeconomic environment, the industry reached its highest-ever annual occupancy and grew RevPAR for the ninth year in a row–albeit at a rate lower than the long-term average,” Hite said.

Hite noted all hotel classes recorded RevPAR gains, but said the upscale and upper-upscale segments showed occupancy declines. “We expect this trend to continue throughout 2019,” she said.

Overall, 21 of the 25 largest markets recorded year-over-year RevPAR growth last year, STR reported.

STR Senior Vice President of Lodging Insights Jan Freitag said the hotel industry sold more rooms in December 2018 than any other December on record, “but the growth in number of rooms available is now basically in equilibrium with demand growth,” he said. “This trend will likely continue and will likely lead to occupancy declines going forward.”

Marcus & Millichap, Calabasas, Calif., noted steady economic growth coupled with improving hotel property performance metrics is sustaining demand for hotel properties nationwide. Transaction velocity increased nearly 6 percent during the 12 months ending in September with Florida, California, Georgia and Texas leading sales volume among states, the firm’s Fourth Quarter Hospitality Research report said. Increased bidding for hotels boosted property values 9 percent during this time to $110,700 per room.

“High first-year returns are driving interest for hotel properties from investors seeking less volatility and greater yields than other investment options,” M&M said, noting assets currently change hands with cap rates averaging in the mid-8 percent range but cap rates can vary as much as 200 basis points based on location and chain scale. “These returns are enticing buyers from Asian countries, like Singapore and China, who are increasingly targeting hotels in the U.S.,” the report said.

Marcus & Millichap Capital Corp. President David Shillington said the hotel sector “bucked the trend” of how asset valuation has responded to the rising cost of debt. “Hotel cap rates have remained steady for the last couple of months while those of other commercial properties have begun to rise,” he said. “Moreover, the gap between Treasury yields and hotel cap rates is relatively wider when compared with other property types. This extra room allows hotel values to better absorb the interest rate pressure.”

But Shillington said cap rates may eventually adjust upward as interest rates continue to rise.