Fitch: Hotels Entering Late Stages of Cycle

U.S. lodging fundamentals remain unusually strong considering the sector recently crossed its 59th consecutive month of growth, reported Fitch Ratings, New York.

But Fitch said most indicators suggest the sector has entered the latter phases of this cycle. “Real revenue per available room exceeded its prior cycle peak earlier this year and real average daily room rates are now only 1 percent below [the] previous high water mark,” the ratings firm said. “Room rate gains are driving RevPAR growth, rather than occupancy. Group demand is accelerating, particularly for large groups.”

Mark Woodworth, president of PKF Hospitality Research, Atlanta, said hotel sector conditions have not changed very much. “The first part of the year for all intents and purposes played out exactly as we had expected, and there is nothing that I’m aware at least for the balance of the year that things won’t play out just like we’ve been thinking for some time now. Then 2016 should look very good.”

The year after that will bring some changes to the hotel sector, said Jack Corgel, real estate professor at Cornell University, Ithaca, N.Y., “because at that time for the nation as a whole, supply growth will exceed demand growth,” he said. “That seems like really bad news, but we’re still not seeing supply growth exceed the long-run average and demand growth is being pushed down by the tremendous opportunity there is to raise room rates.” Corgel said that room rate growth could reach the 5 to 6 percent range in 2017.

Hotel managers certainly remain overwhelmingly upbeat. “The hotel industry is in the midst of arguably its greatest growth period since STR Inc. began recording data in the 1980s,” said Dave Hogan, president of the Hospitality Asset Managers Association. “As an industry, hotels have reached their highest recorded occupancy and rates are approaching historic highs.” 

Hogan said some analysts believe that sales prices have started to peak, meaning hotel management practices will need to change. “This phase of the cycle calls for asset managers to continue focusing on optimizing returns,” he said.