NEW YORK CITY—Muted supply and strong occupancy levels have created highs of historic proportions in the hotel sector. Which begs the question: when will the good times come to an end?
“I keep hearing from the ‘experts’ that new supply is going to be limited for the next couple of years but in a lot of markets I’m seeing a 20-25% increase so I think new supply is heating up,” HREC president and senior principal Geoff Davis said during a recent presentation here to a group of about 30 hotel industry investors, lenders and executives.
He declined to cite specific markets where this is taking place but noted to GlobeSt.com that the firm works in 14 areas and, “in most of the markets we’re in, we’re seeing new supply.”
Still, hotel investors needn’t worry just yet. “Occupancy is going to stay fairly strong,” Davis contends. “You have to look on a market-by-market basis but more people are traveling. Most owners aren’t pushing rate because they’re maximizing occupancy but Smith Travel Research defines 80% occupancy as a full night when a hotel reaches that number, it can start pushing rate.”
And the state of the capital markets is helping the industry, Davis asserts. “There’s plenty of debt and equity capital in the market. Many more players from different sectors of the investment community are coming forward, including mezzanine and bridge lenders versus just those offering senior capital because investors are trying to get their capital deployed and its competitive, on both the lending and selling sides.”
Even international banks are offering bridge and mezzanine debt, as is an insurance company, Davis contends, although he declines to name names. The money issuance may be driven by what often propels people to act: competition.
“I think this is happening because investors are trying to get their capital deployed and its competitive, both on the lender and borrower side,” Davis says.
Still, he cautions against investors getting too giddy. “There’s so much debt capital that we could be back to a situation where underwriting is less disciplined and that could lead to problems down the road.”