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Hotel Development Insider

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HVS: 2020 Hotel Outlook

The experts at HVS released their initial outlook for next year. Here it is:

U.S. Lodging Industry: Stability in 2019 Extends Cautious Outlook into 2020-21

By: Rod Clough and Dan McCoy

The U.S. lodging industry remains in a period of heightened performance,

with RevPAR hovering near all-time highs, profitability strong, and values

more than fully recovered from the lows of ten years ago.

With the market peak extending well beyond what most thought possible

several years ago, many hotel owners are relatively well positioned to

continue benefiting from sustained peak performance. Although the cloud

of economic uncertainty is looming over the outlook for the next 18

months, no major shift in market dynamics is expected through the near


The U.S. economy grew at rate of 1.9% in the third quarter of 2019, slightly

lower than the 2.0% rate of the previous quarter, as business investment

fell (attributed partly to the ongoing trade war). Although the growth of

consumer spending slowed from the prior quarter, it remained relatively

strong and kept the overall results positive. It is important to note that

economists surveyed by the Wall Street Journal (WSJ) had only expected a

1.6% rate of change, a more substantial slowdown that did not materialize.

Consumer spending increased by 2.9% in the third quarter, and with

spending driving 70% of the U.S. economy and with direct effects on the

U.S. lodging industry, this remains a positive sign. Moreover, U.S.

unemployment remains at a very low 3.6% as of November 2019, and

economists surveyed by the WSJ expect unemployment to remain under

4.0% through 2020, on average. As unemployment has remained low,

wages have begun to rise, albeit at a relatively modest level around 3%

annually in 2019.

Three Fed rate cuts in the third quarter of 2019 signal that the Fed has

taken a proactive stance to protect the nation against a sharp economic

downturn. Low interest rates are expected to remain in place through

2020, although additional rate cuts are not anticipated at this point.

Interest rates for hotels have dipped back down after rising in 2018, with

long-term fixed rate debt for strong deals available below the 5.0% mark at

loan-to-value ratios in the 60% to 70% range. On the flip side, institutional

lenders are taking a relatively conservative approach to more challenged

assets, as well as new construction. In this environment, higher-cost,

alternative debt sources are increasingly filling the capital-stack gap for

value-add repositioning and new development.

The cautious approach of institutional debt toward proposed hotel

projects, along with rising construction costs, is helping keep new supply in

check. According to STR, the U.S. market is on a trajectory to add 2.0% to

the overall room supply in 2019, similar to the 1.8% and 2.0% added in

2017 and 2018, respectively. Based on the number of projects currently

under construction and in the pipeline, this seemingly manageable pace of

growth for the nation as a whole is expected to continue into 2020 and

2021. Although the overall pace of supply growth has been relatively

modest, it has primarily been focused on major urban and suburban

markets in the upper-midscale through upper-upscale market segments.

As such, some individual market areas are experiencing saturation as

supply growth has outpaced demand.

The boom in the “sharing economy” continues to be a hot topic in the U.S.

According to AirDNA, there were 6.2 million active “entire home” units

available through September 2019 for overnight accommodations in the

nation, up 16% from 2018. In terms of classification, “entire home” units

differ from “private rooms” or “shared rooms,” in that they can be

deemed most competitive with traditional hotel rooms. This compares to

5.3 million available units in the traditional hotel sector; accordingly, the

supply of shared accommodations now represents a volume greater thanthe available supply of traditional hotel rooms. However, it is important to

note that an “active” unit in the shared accommodation space can be

considered as a unit that is rented at least once per year. Unlike a hotel

room that remains available for 365 days of the year, quantifying the

available annual supply of units in the shared accommodation space

becomes difficult because these units can be added/removed from the

market as owners desire. Despite this growth in the available supply of

shared accommodations, the hotel market has continued to illustrate yearover-year RevPAR growth from 2010 through 2019, although some market

participants have reported increased competition in recent years, partly

arising from the availability of non-traditional hotel rooms. As such, in the

current environment, quantifying the direct impact of shared

accommodations on the performance of traditional hotel rooms has

become difficult. Furthermore, efforts by cities to curb the explosive

growth of this sector with increased regulation are starting to take hold.

For example, Los Angeles has limited short-term rental units to primary

residences, and for no more than 120 days annually.

Although supply-side metrics appear to remain in check, slowing and

increasingly uncertain economic conditions have hampered demand and

revenue growth. According to STR, occupancy and average daily rate (ADR)

averaged roughly 68% and $132, respectively, as of the year-to-date period

ending October 2019, reflecting a RevPAR of $89; RevPAR has increased

just 1.0% in 2019, as supply and demand growth remain largely in balance

and as ADR has grown at a meager pace. Sluggish economic growth should

extend through 2020, supporting similar modest yet positive increases in

revenue levels for the U.S. lodging industry. We expect occupancy and ADR

to end near 66% and $131, respectively, in 2019, and we forecast

occupancy to be between 65% and 66% in 2020, with an ADR gain between

$1.00 and $2.00.

As RevPAR growth limps along, the hotel transaction market has come

under pressure, due in part to rising labor costs. While overall profitability

remains relatively strong, operational costs are now rising faster than

revenues, compressing net operating income (NOI) levels from the recent

historical peak. This compression, coupled with anticipated new supply

additions to most markets, is resulting in a diverging NOI outlook between

sellers and buyers. This dynamic has resulted in a reduction in both

individual and portfolio transactions in 2019 and is likely to keep the

overall transactions market for the nation in check for the time being. In

this environment, cap rates and discount rates remain at relatively low

levels, and potential investors are increasingly wary of buying into the

peak of the market. Given these conditions, we anticipate that relatively

strong pricing and a somewhat subdued transaction market will remain in

place into 2020.

Within the context of this outlook for the overall U.S. market, the

conditions of individual lodging markets vary widely, with some

experiencing robust growth and others in a correction phase. Each market

is subject to local dynamics affecting supply growth, demand generation,

and expense levels that influence the outlook for hotel performance. As

such, it is important to consult with local market participants and experts

in order to evaluate the performance outlook for an individual hotel

market or assets.

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