Hotels: Headwinds or Goldilocks?

New hotel bookings are slowing just as the hotel delivery pipeline swells. But some analysts say the sector is well positioned for health.

TravelClick, New York, reported that hotel bookings for business travel fell 4 percent over the past 30 days. “It’s becoming abundantly clear that there are stronger headwinds ahead for hoteliers in 2016,” said TravelClick Senior Industry Analyst John Hach. 

Meanwhile, STR, Hendersonville, Tenn., identified a sizeable pipeline: 529,665 hotel rooms in 4,322 projects are under contract, up 22 percent compared with July 2015. Under contract data include projects in the construction, planning and final planning stages.

Jack Corgel, Managing Director with CBRE Hotels Americas Research, said hotel demand “usually falls victim to the natural death of the up-cycle” barring catastrophic events. “This current expansion phase has lasted more than 27 quarters, so it is likely that a recession is near given that certain past up-cycles were either shorter or slightly longer than this recovery,” he said. 

In a special report, Goldilocks and the Three Reasons Most Hotel Markets Will Not Become Overbuilt, Corgel said another down-cycle could occur due to overbuilding. But he cited three reasons why excessive supply growth likely will not produce distress in most U.S. hotel markets.

First, six years after the last trough, developers have added only 200,000 hotel rooms to the U.S. inventory–far less than 1 percent growth, Corgel said. This is 50,000 rooms less than at the same time during the 2002-2010 recovery and nearly 250,000 rooms less than at the same time during the 1992-2002 recovery. 

In addition, two significant frictions inhibit future hotel supply growth, Corgel said: stricter banking regulations and persistently high construction costs. “During the first half of 2015, bank regulators introduced a requirement that banks making loans for high-volatility commercial real estate would need to set aside additional capital that could amount to 150 percent of that required for other types of lending,” he said. And construction costs remain elevated and continue to increase. Corgel cited a recent CBRE study that said construction labor costs exceeded gains from lower commodity prices.

Corgel noted that several factors “unnaturally” boosted hotel construction in the past, including IRS accelerated depreciation rules in the 1990s and a finance-driven boom in single-family homebuilding in the 2000s. But there are no “booster rockets” for hotel building at the moment, he said. “The EB-5 program [which encourages foreign residents to invest in U.S. commercial real estate] is the only booster rocket from Washington that could affect a hotel-building spike,” he said. “But the limitations of this program will almost certainly result in EB-5 resembling a kid’s water-pressure-propelled rocket rather than an Elon Musk SpaceX design for launching a wave of non-economic hotel development projects.”

Supply growth will likely “moderately” exceed demand growth in the U.S. hotel market for the next two years, Corgel said. But since occupancy currently exceeds its long-term average, this supply increase should bring hotel markets into balance later this decade, he noted. 

“A ‘Goldilocks’ supply scenario is likely to take place over next few years in most cities: not too many and not too few hotel rooms created,” Corgel said.