Near‐Term Outlook for Lodging Remains Positive

While the longer economic growth endures, intuitively the risk of recession rises. Despite GDP indicative of a slowing economy during Q4 2019, the U.S. economic expansion which commenced in June 2009, is soon approaching the longest post‐World War II expansion with uninterrupted growth. Investors frequently ponder where we are in a cycle. Is the current economic climate most like 1995, 1999, 2000, 2003, 2008 or 2016? While history often rhymes, the reality is we are in 2019, which presents its own set of idiosyncratic risks and opportunities. Many economists have opined that expansions do not die of old age, rather they expire due to an unpredictable event(s) such as shocks to oil prices and/or the bursting of asset bubble(s).

As the US economy goes, so goes the nation’s lodging sector fundamentals. Although the hotel industry has been operating at peak levels for several years, accelerated supply growth, which has been readily absorbed in most markets due to the expanding economy, has contributed to weaker than normal average room rate growth. Furthermore, despite shortages of and escalating costs of labor, on average nationally hotel owners and managers have sufficiently controlled other operating costs to achieve the highest levels of gross operating profit margins in more than fifty years. With this said, due in part to rising minimum wage rates, profit margins of numerous assets situated in major U.S. markets have contracted.

The LW Hospitality Advisors (LWHA) Q1 2019 Major U.S. Hotel Sales Survey includes 39 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $2.7 billion and included approximately 7,900 hotel rooms with an average sale price per room of $339,000. By comparison, net of the $1.3 billion trade ($4.3 million per room) of the Sands Casino Bethlehem, and the $95 million sale ($2.375 million per room) of the Soho House Chicago (both of which include substantial revenue from non‐rooms related sources), the LWHA Q1 2018 Major U.S. Hotel Sales Survey identified 55 transactions totaling roughly $2.9 billion including 12,700 hotel rooms with an average sale price per room of $231,000.

Notable observations from the LWHA Q1 2019 Major U.S. Hotel Sales Survey include:

• Sixteen or more than 40 percent of the total number of Q1 2019 sale transactions occurred in three states; With nine Q1 2019 hotel sales, Florida has been the most active transaction market followed by New York and California with four and three trades respectively;
• Subsequent to a reported more than $500 million acquisition by MSD Capital, Host Hotels & Resorts acquired the 429 room 1 Hotel South Beach for $610 million or more than $1.42 million per room from a joint venture between Starwood Capital Group & LeFrak Organization;
• Seven Q1 2019 U.S. hotel sales transacted between $100 million and $199 million each
• Hotel centric investment entities that were active purchasers and sellers of lodging assets during Q1 2019 include: Apple Hospitality REIT Inc.; Ashford Hospitality Trust Inc.; AVR Realty; AWH Partners; Blackstone Group; Host Hotels & Resorts; Magna Hospitality Group; McSam Hotel Group; Noble Investment Group; Pacifica Hotels; Park Hotels & Resorts Inc.; Peachtree Hotel Group; Pebblebrook Hotel Trust; Rockbridge; Starwood Capital Group.

Current threats to the U.S. lodging industry include (but are not limited to): continued international trade tensions and effects from tariff rate implementation, domestic and international political uncertainty, natural disasters, terrorism, maturation of Airbnb as it delves deeper into the mainstream hotel market, and OTA pricing transparency placing negative pressure on room rate growth. The sector continues to be challenged with continued historically low unemployment and rapidly rising wages, as well as property tax and insurance expenses increasing at levels well above underlying inflation. Although the nation is experiencing a slowdown of inbound international demand, domestic air passenger growth remains steady. Notwithstanding a cautious backdrop due to a variety of heightened macro/growth concerns, hotel financing continues to be widely available with debt providers competing by narrowing spreads even with interest rates falling once again. Furthermore, an array of investable foreign and domestic equity is broadly available as record amounts of capital chases yield.

While the fundamentals of the U.S. lodging industry are simultaneously favorable to buy, sell, refinance, and develop a variety of lodging product types, and the near‐term outlook for lodging remains positive, given a myriad of global and domestic issues that can rapidly develop into full blown crises, short term future industry performance is fragile.

Daniel H. Lesser is the president and CEO of LW Hospitality Advisors LLC. The views expressed here are the author’s own and not that of ALM’s Real Estate Media.