The Hunter hotel investment conference in Atlanta endedÊlast weekÊand we have a roundup of key takeaways about the US investment and performance market from host Hunter Hotel Advisors and from the CEO of asset management firm hotelAVE, Michelle Russo.
Hunter’s commentary
Tone has improved.ÊCompared to the 2016 conference, participants and speakers are decidedly more optimistic. It sounds like bid-ask spreads on hotels are more reasonable, the lending environment is no longer on lock down, and general growth expectations have improved.
Cap rates could stabilize.ÊBid-ask spreads sound to have narrowed. Following an anemic deal landscape in 2016, most expect a better set up for 2017. While the market does not sound deep, it sounds better than last year. It is consensus that the buyer pool in 2017 is much larger than 2016. The 2016 cap rates were up ~150bps versus 2015. Most expect them to settle there, pointing to the relative yield of lodging versus other real estate classes (office, multi-family, etc.). While interest rates likely rise, the spread of lodging cap rates versus interest rates remains fairly large/could potentially compress if buyer interest is high enough in 2017. More Òmarket by market, deal by dealÓ valuation talk was prevalent in terms of the driver of cap rates versus 2014/2015 when deals were Òon fireÓ and 2016 when the market was a Òwasteland.Ó
More talk on cost inflation.ÊNOI growth should be constrained as labor/wage inflation is likely to offset most of the rain gains expected to drive RevPAR, pressuring margins. Construction costs consistently called out as rising and breaking deals.
RevPAR ok.ÊRevPAR seems to be tracking in line with industry participants expectations: January strong from inauguration; February just ok; and March benefits from Easter shift with extra group business, but some are pointing to a less than hoped for pickup in March. Most point to 1Q in line with budget and 2017 as looking reasonable/no change versus 90 days ago.
Cycle talk fatigue.ÊThe baseball/sports analogies continue but the frequency has diminished. The lodging industry was late in the cycle/coming to a close, according to some in 2013… 2014… 2015… 2016, and now 2017. While growth in 2016 was not anything to write home about, the cycle prognosticators seemed less opinionated on when the cycle will end at the conference this year.
It just depends.ÊThree years ago, everything was good except New York. This year, whether the question/topic revolves around cap rates, supply growth, RevPAR expectations, etc., the answer is the same: ÒIt depends on the market.Ó The days of RevPAR is good, valuations are rising, supply is not an issue are clearly behind the lodging industry in the US, and it was hard to find a panelist willing to make a general/industry wide statement about anything. A few years ago, the story was… if you net out New York, the US is X. Then it became, if you net out New York and Houston, the US is X. As a number of additional cities have Òfallen,Ó you do not hear of the netting as much today.
OTA/Technology/Guest Experience.ÊThe Òwe own the guest experience and the OTA’s can never touch thatÓ folks were at the pulpits once again. It is hard to identify any meaningful change in terms of actually improving the guest experience to drive repeat business at the hotel/brand level. The answer continues to be price, as the push to book direct at brand.com rests on a discount. Even Starwood Capital’s Barry Sternlicht is scratching his head wondering, ÒHow did the OTA’s get this share for that commission rate?Ó
Takeaways from Michelle Russo, founder and CEO, HotelAVE, Providence, Rhode Island
Outlook continues to decline.ÊTravelClick forecasting 2017 RevPAR at 1 per centÊ(the low end of hotelAVE’s 2017 forecast published in July 2016).ÊThe continued decline in corporate demand and lack of short-term group pickup are concerns.ÊProblem months are July through September.
More optimism about the transaction market.ÊThe year 2015 was the high water mark, and 2016 slowed because of the bid-ask difference and investors waiting out election and interest rate policy.ÊThe view is 2017 is the year of buyer/seller alignment.
There isÊa lot of available capital and buyers.ÊBut there’s still a dearth of quality product for sale.ÊSome expect listings to pick up over next 30-60 days.
Marriott is addressing the Sheraton “quality gap.”ÊCocktail discussions referred to it as “Marriott’s 3 Choice Plan” 1) do the full PIP 2) become a Delta or 3) leave the system and pay LDs.
Barry Sternlicht’s keynote speech was fundamentally bullish on the economy.ÊThis comes despite highlighting concerns about the impact of immigration reform on available labor resources and the expectation for continued interest rate increases. Despite the length of the current cycle and tightening standards for construction financing, capital, brokers and lenders cited a lot of development opportunities being pitched.
By Jeff Weinstein from Hotelsmag.com
