Hotel Sector Approaches Peak: Fitch

NEW YORK CITY—Hotel performance continues climbing to record levels, Fitch Ratings says, although in many markets the sector appears to be moving past its peak. In its quarterly update of the four major property types, the ratings agency sees stability in hotel, multifamily and office, while retail is stabilizing.

Along with posting 59 consecutive months of RevPAR growth through July and benefiting from the tailwinds of favorable demand barometers, hotels also have low oil prices in their favor. Fitch also sees positive omens for refinancing existing hotel CMBS deals: increasing property values, continued low interest rates and limited supply.

That's limited new supply broadly speaking; Fitch cites four markets, including its hometown of New York City, that should be watched for potential oversupply. Along with New York, which has by far the largest number of rooms under construction, other development hot spots include Houston, Seattle and Miami.

Further, if low oil prices bode well for most hotel markets, they're troublesome for Houston and Calgary. Other macro events, such as the impact of California's drought laws on resorts with water attractions or golf courses, need to be taken into account, as does the possible dampening effect of the strong US dollar on international tourism.

Another property sector with five years' strong growth behind it as well as tailwinds for its future, multifamily also is marked by the prospect of “significant” increases in supply for some markets, Fitch says. That portends vacancy increases in some markets; citing data from Reis, Fitch says Washington DC is already there. The apartment vacancy rate in the nation's capital has moved upward from 4.2% in the second quarter of 2012 to 6.9% in Q2 of this year, as “record new supply in the market over the past two years has been slow to be absorbed.”

Reis is predicting a vacancy increase for Houston, as well, Fitch says, with the energy hub's new supply outpacing demand by 2019. That's the case even as some multifamily projects may be postponed amid uncertainty over the impact of low oil prices on its economy. Conversely, Fitch notes that the diversity of Houston's economy makes it difficult to gauge that impact, while in the near term, the city's apartment vacancy has continued to trend downward, falling 100 basis points year-over-year to 5.7% at the end of Q2.

That's not the case for the office sector in Houston, where vacancy has increased to 15.6% from 14.2% a year earlier. Its construction pipeline is the fullest of any US city, with its 11 million square feet exceeding even the 9.5 million square feet underway across New York City.

Outside of Houston, Fitch is keeping an eye out for a potential “tech bubble” in the Bay Area as well as Seattle, Boston and New York. That's the case especially as certain tech-heavy submarkets in those cities, such as Midtown South in Manhattan and Cambridge/Route 128 North in Boston, have seen Y-O-Y rent increases of more than 7%.

Retail vacancy nationwide has reached a new low, while rents have achieved modest (0.6%) Y-O-Y growth. Of concern, says Fitch, are continued store closings along with underperforming class B and C malls in secondary and tertiary markets. Among the retailers that have announced or implemented closings recently are the Gap,  Family Dollar, Dollar Tree, Dollar General, Macy's, Office Depot/Office Max, American Eagle and Golf Galaxy.