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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