U.S. LODGING INDUSTRY OVERVIEW

Transcription

1 April 2018 U.S. LODGING INDUSTRY OVERVIEW HOSPITALITY & GAMING A Cushman & Wakefield Valuation & Advisory Publication

2 A Cushman & Wakefield Valuation & Advisory Publication INTRODUCTION 2018 Is the Cycle Waning, Steady, or Just Beginning? By the end of the year, the U.S. hotel industry performance neither disappointed, nor did it delight. Investors had been expecting slowing rate growth and a contraction in occupancy. However, the U.S. hotel performance ended the year slightly more positive than anticipated. The surprise was the growth in demand, particularly in the second half of the year. 2

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4 A Cushman & Wakefield Valuation & Advisory Publication The following chart depicts operating performance for the U.S. Lodging Industry from 1995 through year-end U.S. Historical Operating Statistics: and Quarterly Comparisons Year Supply % Change Demand % Change Eq. Index Occ % Change ADR % Change RevPAR % Change ,551, ,198, % --- $ $ ,636, % 857,953, % (0.3) % 64.6 (0.3) % % % ,763, ,383, (0.9) 64.1 (0.8) ,912, ,625, (1.2) 63.3 (1.2) ,062, ,878, (0.8) 62.8 (0.8) ,178, ,098, ,277, ,657,287 (3.4) (5.7) 59.7 (5.6) (1.4) (7.0) ,344, ,753, (1.2) 59.0 (1.2) (1.5) (2.7) ,389, ,463, ,410, ,155, ,413, ,016,609, ,439, ,027,327, ,468, ,030,858, (0.3) 63.2 (0.3) ,586, ,011,561,443 (1.9) (4.5) 60.4 (4.4) (1.7) ,734, ,266,656 (5.9) (9.1) 55.1 (8.8) (8.5) (16.5) ,827, ,014,568, ,842, ,062,135, ,848, ,087,435, ,885, ,110,527, ,923, ,157,230, ,971, ,189,614, ,039, ,205,133, (0.1) 65.5 (0.1) ,121, ,233,203, Avg Annual % Change 1.7 % 1.7 % 0.1 % 0.1 % 3.0 % 3.1 % Q ,976, ,649, % --- $ $ Q ,051, % 277,747, % 0.7 % % % % Q ,048, ,615, % --- $ $ Q ,123, % 324,100, % 0.2 % % % % Q ,079, ,431, % --- $ $ Q ,165, % 339,344, % 0.4 % % % % Q ,054, ,436, % --- $ $ Q ,144, % 292,012, % 1.6 % % % % Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 4

5 While new hotel supply continued to open, operators in many markets managed demand to absorb the additional rooms. Although revenue growth slowed, it did not stall or decline. Industry participants are now expecting that this muted long-term growth can be expected going forward. The uncertainty that characterized 2017 has been generally replaced in 2018 with confidence. The chart to the right shows the year-end and previously forecasted national lodging fundamentals relative to the expectation for Overall, national RevPAR was stronger than the predictions; however, the differences between the actual results from 2017 and the forecasts illustrate the interrelation between rate and occupancy. Average rate was lower than anticipated, implying rate discounting by operators even as supply growth did not materialize and demand exceeded expectations. Natural disasters also impacted lodging performance as did domestic and global travel trends. Overall, however, the hotel industry continues to expand. This growth is illustrated in the following chart. Forecast vs. Actual 2017 YE Forecast (prepared in 2016) 2017 Actual 2018 YE Forecast (prepared in 2017) Supply 2.0 % 1.6 % 2.0 % Demand Occupancy ADR RevPAR Source: STR Global U.S. Room Revenue Year Supply % Change Demand % Change Total Room Revenue % Change RevPAR % Change ,551, ,198,343 $55,880,601,208 $ ,636, % 857,953, % 60,720,832, % $ % ,763, % 880,383, % 65,811,913, % $ % ,912, % 904,625, % 70,671,928, % $ % ,062, % 931,878, % 75,332,686, % $ % ,178, % 965,098, % 82,219,256, % $ % ,277, % 932,657, % 78,304,966, % $ % ,344, % 935,753, % 77,394,990, % $ % ,389, % 948,463, % 78,558,310, % $ % ,410, % 987,155, % 85,155,672, % $ % ,413, % 1,016,609, % 92,464,809, % $ % ,439, % 1,027,327, % 99,972,192, % $ % ,468, % 1,030,858, % 106,750,063, % $ % ,586, % 1,011,561, % 107,706,669, % $ % ,734, % 952,266, % 92,819,617, % $ % ,827, % 1,014,568, % 99,372,859, % $ % ,842, % 1,062,135, % 107,877,712, % $ % ,848, % 1,087,435, % 115,320,771, % $ % ,885, % 1,110,527, % 122,499,628, % $ % ,923, % 1,157,230, % 133,537,859, % $ % ,971, % 1,189,614, % 142,717,142, % $ % ,039, % 1,205,133, % 149,315,822, % $ % ,121, % 1,233,203, % 156,234,286, % $ % Source: STR, Cushman & Wakefield Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited In 2017, the increase in overall revenue was supported by positive fundaments and the absorption of new supply, continuing the post-recessionary expansion that began in Since that year s nadir, supply has increased a total of 8.2% while demand has grown 29.5%.. Revenue growth slowed in 2016 and 2017 relative to the prior six years but was only slightly below the average annual revenue growth since 1995 of 4.9%. Even with the robust pipeline of new hotels planned for the next few years, the industry is expected to continue to thrive. The downward trajectories of prior U.S. hotel cycles in 2001/2 and 2009/10 have been event precipitated, and barring an unforeseen occurrence, market participants are embracing the prospect of sustained revenue increases, albeit at lower levels than from 2010 to

6 A Cushman & Wakefield Valuation & Advisory Publication NATIONAL HISTORICAL ANALYSIS The U.S. lodging industry is now in its 90th month of record growth driven by the unexpected velocity of demand. After a softening of business and group travel beginning in 2016, road warriors and meeting planners started to return to hotels in the second half of Nationally, transient demand made up of business and leisure guests continued to dominate the use of hotel rooms. STR reported that from 2011 through 2017, demand growth from the transient segment was 18.8% compared to 7.0% increase for the group segment during those same years. Despite the dominance of transient demand growth, average rate increases during this period have been fairly balanced between the two segments, with transient growth of 23.0% and a group rate increase of 21.0%. The following chart illustrates the inextricable influences of rate and occupancy since U.S. Occupancy, ADR, and RevPAR P $ % $ $ $ % 70.0% $95.00 $85.00 $75.00 $ % 60.0% 55.0% $ % $45.00 $ % $ P ADR RevPar Occ % 40.0% Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 6

7 Generally, industry participants expect slower growth over the next few years allowing for the steady absorption of new supply. The following chart is a different look at the supply and demand trends, showing the deceleration of hotel fundamentals. In the second half of 2017, supply and demand lines are converging for a longer period than any prior point during the last 20 years, and RevPAR is tracking more consistently with demand due to the more stable occupancy levels and stronger average rate changes. Other influences also impacted the market s performance in Wildfires and mudslides in California and hurricanes in Florida and Texas changed travel patterns in those states in the second half of the year. International travel to the U.S. continued to decline with some international visitors choosing non-u.s. destinations in response to safety concerns from gun violence and perceptions of the country s social and political climate. The new administration s travel and immigration policies and a continued strong dollar also deterred some global visitors. Hotel demand from business travel began to rebound in 2017 and, according to American Express, is expected to grow in Group demand is also expected to improve. The American Express 2018 Global Meetings Forecast noted an interest in shorter meetings in 2017 and an emphasis on the quality of the experience over the length of the meeting. The tight meeting budgets implemented in recent years are expected to remain a priority for meeting planners and, although meeting attendance is anticipated to grow, budgetary concerns mean negotiations for hotel rooms and other components of travel may remain constrained. These competing influences are impactful on more moderate revenue growth expectations. 12-Month Moving Average 12.0% 9.0% 9.1% 8.3% 8.2% 6.0% 6.3% 6.8% 4.1% 4.3% 3.0% 0.0% -3.0% -6.0% -9.0% -12.0% -4.4% -10.2% -6.4% -15.0% -16.0% -18.0% Supply % Change Demand % Change RevPAR % Chg Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 7

8 A Cushman & Wakefield Valuation & Advisory Publication STR TOP 25 MARKETS The top performing areas of the U.S. continue to be dominated by New York, San Francisco, and Oahu with their high average rates and occupancies. Both New York and Oahu were also in the top five markets for new supply growth. The absorption of this new supply with relatively low impact on performance, evidences the perennial strength of these destinations. Over the past five years, Manhattan has witnessed a 22.0% increase in demand in the face of a 20.0% increase in supply; diminishing worries that growth in demand would not keep pace with that of supply. Nevertheless, operators will continue to maintain a close eye on yielding demand as a potential 5,500 additional rooms slated to come on-line in This spike could hamper the market s ability to increase ADR. Once the new supply is absorbed, with an overall improved product offering, Manhattan hotel operators should be well poised to reverse this trend, resulting in upward pressure in ADR and corresponding RevPAR in the next 12 to 24 months. While the pipeline for San Francisco remains robust, relatively few new hotel rooms have opened. Declines in that market s performance are more closely tied to the ongoing Moscone Center construction and the reduction in group demand, which has resulted in a lack of compression for all segments throughout the Bay Area. For most of the top 25 markets, occupancy has fluctuated within a narrow band of one percent on either side of the 2016 results. Of note is the gain in Houston, where the effects of Hurricane Harvey in September resulted in a spike in hotel demand from displaced residents, first responders, Red Cross, and FEMA, as well as additional temporary workers at local home improvement outlets Top 25 Markets Occupancy Percent Change Year-End Year-End 2016 Year-End 2017 Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 8

9 that operated 24/7 after the disaster. Most of this temporary demand left the market by the end of the year and 2018 s performance is expected to show this contraction. The U.S. national average rate growth stands 3.0% higher in 2017 compared to In the second half of the 2017, rate growth accelerated in most of the markets; only four markets had rate declines by the end of the year. The 3.2% median average rate growth for the top 25 markets exceeded the national average. The surprising leader in rate gain was Nashville, which also witnessed some of greatest increases of new supply in Markets in the southeast and Houston were impacted by the natural disasters. The strength of the U.S. automakers and continued investment in the Detroit market has supported a notable average rate recovery. With the overall strong occupancy levels, industry participants are perplexed about the lack of pricing power in markets that are, for the most part, still strong. Expectations are that rate growth will continue to be moderate as new supply comes on-line over the next few years. Top 25 Markets Average Rate Percent Change Year-End Year-End 2016 Year-End 2017 Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 9

10 A Cushman & Wakefield Valuation & Advisory Publication As a result of the average rate and occupancy trends shown, RevPAR in 2017 remained largely positive. Orlando and Houston were influenced by national disaster. San Francisco continued to be negatively impacted by the Moscone Center construction. Minneapolis witnessed a hotel supply boom in anticipation of the 2018 Super Bowl. New Orleans was affected by increases in supply, a weak convention calendar, and Hurricane Nate, which also reduced offshore drilling starts. Despite the constant delivery of new hotel rooms, New York finished 2017 with a RevPAR gain. Top 25 Markets RevPAR Percent Change Year-End dollars Year-End 2016 Year-End 2017 Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 10

11 SEGMENTATION ANALYSIS Equally as important to consider as geography is the performance by segment, identified in the STR Chain Scales indicated in the following chart for the year-end According to STR, over 68.0% of new hotel construction is in the Upscale and Upper Midscale segments, representing selectservice and extended-stay hotels with limited public space. Even with the strong increases in supply in these product segments, the even greater gain in demand has supported growth in both occupancy and rate. The success of these hotels is driven by brand loyalty and the expansion of convenience with a large product footprint. The luxury segment is also an attractive area for new hotel development as high construction costs in many urban areas require a commensurately priced product. The pipeline for new hotel supply is expected to wane and industry participants anticipate that 2018 will mark the peak for new hotel openings in this cycle. The economy segment continues to be the least feasible hotel product for new hotel development due to the relationship between average rate and construction costs. With a declining inventory and steady demand of this product type, gains in rate supported the highest RevPAR growth rates of all the segments in Despite this increase, average rates in many markets have yet to support new hotel construction of economy lodging. Segmentation Data 6.0% 5.0% 4.0% 4.3% 4.0% 4.8% 4.7% 3.1% 3.0% 2.0% 2.2% 1.7% 2.4% 1.9% 1.4% 2.3% 1.6% 1.5% 1.6% 1.3% 1.2% 1.0% 0.3% 0.4% 0.5% 0.6% 0.3% 0.2% 0.8% 0.0% -1.0% Supply Demand ADR Occupancy -0.4% Luxury Upper Upscale Upscale Upper Midscale Midscale Economy Source: STR Republication or Other Re-Use of this Data Without the Express Written Permission of STR is Strictly Prohibited 11

12 A Cushman & Wakefield Valuation & Advisory Publication SUPPLY AND DEMAND All but one of the top 25 markets was impacted by new supply in In 14 of the markets, demand exceeded supply resulting in occupancy gains and average rate increased in 19 markets. Only four markets saw actual declines in RevPAR. The following chart shows the relative performance of the top 25 markets based on the primary indicators of supply, demand, and RevPAR for 2017 compared to Supply vs. Demand 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0% Supply Demand RevPar Source: RCA/Cushman & Wakefield 12

13 TRANSACTIONS MARKET Data from Real Capital Analytics (RCA) indicates that transaction volume for the second half of 2017 declined relative to 2016 and Last year, the number of full service hotels sold dropped 23.0% from 2016, a deeper drop from the 15.0% fewer hotels sold that year compared to Sales of limited-service hotels in 2017 were more on par with 2016, with only a 4.0% decline in the number of properties. Private equity investors were the most active market participants as both buyers and sellers. Institutional groups were notable sellers but more reticent buyers. REITs transactions were greater in 2017 than in 2016, but in terms of total volume, this sector ended the year as net sellers. Overseas investment in U.S. hotels was less than one-quarter the volume in 2017 than 2016, as Chinese buyers faced government constraint. However, buyers from other countries, primarily in Asia and the Middle East, are still interested players seeking mid-market assets in secondary and tertiary markets. On a per-room basis, full-service hotel prices declined 31.0% from $255,000 to $177,000. Conversely, overall capitalization rates for full-service hotels declined from 8.1% to 7.9%. Limited-service hotel sales increased on a per-available room basis by 3.0% from $83,000 to $86,000. According to RCA, capitalization rates for this segment also increased in the first half of the year from 8.7% to 9.0%. The majority of sales were individual transactions with only a few portfolio sales reported in both periods. The West Coast and Southeast continue to be the most attractive markets for hotel acquisitions. As seen in the following chart, these two markets account for over 50% of all sales volume. On the MSA level, Dallas topped the list of number of properties sold, followed by Atlanta, Chicago, and Los Angeles. Houston, Phoenix, Seattle, Orlando, and Tampa were also among the most active transaction markets. Secondary markets in the Midwest and Northeast had the fewest number of sales. For 2017, RCA reports overall capitalization rates for all hotels averaged 8.8%, a 50 basis point increase over the mid-year data and the 2016 average of 8.5%. Full-service hotels overall capitalization rates averaged 7.8% and limited-service hotels averaged 9.2%. The 140-basis-point difference in the capitalization rates between the two product types is one of the highest spreads in recent years. The moderating growth in RevPAR and threat of new supply in many markets remains of concern to investors. U.S. Hotel Transaction Volume 2005 to volume (Billions $) Source: RCA/Cushman & Wakefield Full Service Limited Service 13

14 A Cushman & Wakefield Valuation & Advisory Publication Hotel transactions in 2018 may continue to moderate as investors seek to recapitalize or restructure the deal rather than selling. Other owners are pursuing conversion and repositioning of existing assets to unlock value. Market participants report that a scarcity of attractive deals is stalling transactions, particularly for buyers seeking large institutional properties or those investors hunting more entrepreneurial value-add acquisitions. Equity and debt financing for hotel transactions in 2017, especially in the second half of the year, was more readily available and favorably priced. Aggressive competition for lending on hotel assets with strong sponsors supported the hold versus sell strategy of investors. Hotel debt is still available from all major financing sources: commercial banks, CMBS, and debt funds. The CMBS products included both floating- and fixed-rate mortgages, particularly for single asset/single borrower transactions. With an abundance of liquidity in the market, spreads tightened by the end of the year, and loan-to-value ratios and debt yields were compressing for primary and mezzanine loans. Libor increases for floating-rate debt can have the effect of countering spread compressions. Debt for new construction remains less available with lower loan-to-value ratios and higher spreads. Owners, buyers, and lenders expect to pursue robust refinancing activity at least through the beginning of 2018 Transaction Volume by Region Mid Atlantic, $2.83, 10% Midwest, $2.75, 10% West, $8.25, 30% Northeast, $3.65, 13% Southwest, $3.88, 14% Southeast, $6.16, 23% Mid Atlantic Midwest Northeast Southeast Southwest West Source: RCA/Cushman & Wakefield 14

15 CONCLUSION AND OUTLOOK Overall, the trends in 2017 showed a modulation of 2016 s uneven market. The recognition of more moderate revenue growth seemed to reduce some of the prior uncertainty. Since the second half of 2017, market participants remain actively engaged in the market, seeking opportunity to buy, convert, and build hotels, and lenders are enthusiastically supporting these efforts with favorable debt. While the impact of the new administration s immigration policies on international travel and the availability of labor are of high concern for investors and operators, the tax changes are anticipated to be a positive factor in Nevertheless, potential interest rate hikes and inflation loom as possible dampers on the currently robust capital markets and sustaining performance fundamentals. Industry pundits differ on the interpretation of the current status of the hotel investment market cycle. While some participants muse that the cycle will continue until an unforeseen event precipitates an actual decline, other opine that the cycle has already ended, and we are in a new cycle. Regardless of the interpretations, the progressive growth in 2017 was regarded favorably, and 2018 is anticipated as a generally positive year for the hotel industry. For more information, contact: Eric B. Lewis, MAI, FRICS Executive Managing Director Practice Leader, Hospitality & Gaming eric.lewis@cushwake.com Mark Capasso, MAI, CRE Executive Director Practice Leader, Hospitality & Gaming mark.capasso@cushwake.com Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit or on Twitter. This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications Cushman & Wakefield, Inc. All rights reserved. cushmanwakefield.com Elaine Sahlins, MAI, CRE Managing Director elaine.sahlins@cushwake.com 15

16 About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit or on Twitter. Eric B. Lewis, MAI, FRICS Executive Managing Director Practice Leader, Hospitality & Gaming eric.lewis@cushwake.com Mark Capasso, MAI, CRE Executive Director Practice Leader, Hospitality & Gaming mark.capasso@cushwake.com Elaine Sahlins, MAI, CRE Managing Director elaine.sahlins@cushwake.com cushmanwakefield.com Copyright 2018 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.