Hotel Sector Faces Volatility
Healthy economic momentum and consumer confidence have boosted travel and hotel performance, but the sector could see more volatility in 2019, analysts say.
TravelClick, New York, studied advance bookings and predicted stable rates and bookings across all travel segments for the rest of 2018. Average daily room rates are up 1.8 percent and bookings are up 0.5 percent in the third quarter compared to the prior year.
TravelClick Senior Industry Analyst John Hach said the revenue per available room growth outlook remains on a positive trajectory. “While new reservation pace is gradually slowing, there is still organic growth in the majority of North American markets,” he said. “This growth, coupled with steady ADR increases, is sustaining a profitable marketplace for most North American hoteliers.”
But Hach noted indications that 2019 reservation growth will be less consistent than 2018. “It is incumbent that hoteliers who are heading into their 2019 budgetary planning sessions take into consideration the changing marketplace, especially when it comes to allocating adequate marketing funds to compete for [non-business travel] transient demand throughout next year,” he said.
Marcus & Millichap, Calabasas, Calif., reported economic growth, improving occupancy and steady RevPAR gains have driven investor appetite for hotels. Transaction velocity picked up 4 percent in the second quarter from a year before as increased competition for hotels and rising revenues elevated property values 6.8 percent year-over-year to $107,700 per room on average, the firm’s Third Quarter National Hospitality Report said.
Higher average first-year returns continue to lure investors to the hotel market, Marcus & Millichap said. Properties trade with cap rates in the mid-8 percent range on average, but rates vary by as much as 200 basis points depending on the hotel’s location and brand.
Marcus & Millichap Capital Corp. President David Shillington noted the Fed continues to push the Federal Funds rate upward, which has increased short-term indexes such as the Prime Rate and LIBOR. But global economic trends and investor sentiments have pushed the long end of the rate curve higher, he said. “The spread between short-term and long-term Treasury yields has been at one of its narrowest levels in recent history,” Shillington said. “The trend is affecting hotel loans that are priced using these short-term indices, such as adjustable rate short-term and construction loans. Conversely, the long-term, fixed-rate loans maintain favorable pricing. Benefiting from this trend are borrowers using permanent loans offered by banks and life companies as well as securitized CMBS lenders.”
Shillington said asset allocation and lending concentration remain an issue. “Many lenders who jumped back into the lending space during the early part of the recovery are still carrying a sizable loan portfolio on their balance sheet,” he said. “While construction and permanent loans are gradually being refinanced as they approach maturity, some banks are taking a cautious stance in increasing their exposure to the hotel sector.”
As a result, alternative lenders are gaining some market share previously filled by commercial banks in the hotel lending space, Shillington said. “These lenders offer a short-term, bridge program designed to help hotel owners and buyers finance transitional assets,” he said. “A few will also lend on ground-up construction projects. Borrowers benefit from the increasing capital flow from these alternative lenders and costs are being kept in check by increased competition.”
