Airbnb is Just One Hotel-Market Detractor

IRVINE, CA—In addition to shaky global economies impacting the hospitality market, the strong run-up in domestic consumer spending on hospitality has hit a plateau and supply is low, Ten-X's chief economist Peter Muoio tells GlobeSt.com. As we recently reported, the firm's latest Commercial Real Estate Nowcast showed that commercial-property pricing rebounded in April, posting month-over-month gains of 56 basis points overall, with that improvement extending to all property sectors aside from hotel; that sector continues to see pricing declines. We spoke exclusively with Muoio about the hotel sector's descending valuations, what he believes is causing them and where he sees this trend heading.

GlobeSt.com: Aside from worsening economies overseas, what could be causing fundamentals to weaken in the hotel sector?

Muoio: The strong run-up in domestic consumer spending on hospitality has hit a plateau. This may reflect uncertainty amid the early-year fog of uncertainty spawned by financial-market volatility or it could just be a breather after a very strong run-up. Certainly, in our view, the strong labor market and the “energy dividend” suggests that household vacation spending should start to increase again. Businesses also saw the early-year equity-market slide and global-economic weakness and recalibrated their business travel spending plans. Finally, Airbnb is having an impact on the margins, particularly on pricing, as it presents an alternative to traditional hotel stays for a larger cohort of personal travelers and potentially in the future for some business travelers.

The other big issue is supply. STR reports that in the first quarter, the growth in supply outpaced the growth in demand for the first time in this cycle and this led occupancies to fall. Now, this may not be a sustained trend, but the pipeline of new rooms is pretty heavy, particularly in certain markets. This supply is being completed just as demand growth is slowing, so the industry is finding itself in a classic supply-demand mismatch, and with that loss of pricing flexibility.

GlobeSt.com: Do you see this trend continuing over at least the next year or so?

Muoio: As I mentioned, consumer spending on hospitality looks to resume rising amid strong job growth, lower unemployment and burgeoning wage growth.  The financial markets have settled down after the upset at the start of the year, so business travel will also likewise pick up. We do not think the cycle is over for the hotel industry, just that it is in a more mature phase. The supply is already on the way, so this will continue in coming years.

GlobeSt.com: What can the hotel sector do to combat these weakening fundamentals?

Muoio: Not panic and look for demand to pick back up amid stronger economic growth. Not sure if there is anything that can be done at this point about the supply issue.

GlobeSt.com: What else should our readers know about the hotel sector?

Muoio: Fundamentals are super healthy. Occupancies are high, room rates have shot up and together these have pushed RevPAR to robust levels. So, what we are talking about here is a downshift—not yet at this point a downturn.

IRVINE, CA—In addition to shaky global economies impacting the hospitality market, the strong run-up in domestic consumer spending on hospitality has hit a plateau and supply is low, Ten-X's chief economist Peter Muoio tells GlobeSt.com. As we recently reported, the firm's latest Commercial Real Estate Nowcast showed that commercial-property pricing rebounded in April, posting month-over-month gains of 56 basis points overall, with that improvement extending to all property sectors aside from hotel; that sector continues to see pricing declines. We spoke exclusively with Muoio about the hotel sector's descending valuations, what he believes is causing them and where he sees this trend heading.

GlobeSt.com: Aside from worsening economies overseas, what could be causing fundamentals to weaken in the hotel sector?

Muoio: The strong run-up in domestic consumer spending on hospitality has hit a plateau. This may reflect uncertainty amid the early-year fog of uncertainty spawned by financial-market volatility or it could just be a breather after a very strong run-up. Certainly, in our view, the strong labor market and the “energy dividend” suggests that household vacation spending should start to increase again. Businesses also saw the early-year equity-market slide and global-economic weakness and recalibrated their business travel spending plans. Finally, Airbnb is having an impact on the margins, particularly on pricing, as it presents an alternative to traditional hotel stays for a larger cohort of personal travelers and potentially in the future for some business travelers.

The other big issue is supply. STR reports that in the first quarter, the growth in supply outpaced the growth in demand for the first time in this cycle and this led occupancies to fall. Now, this may not be a sustained trend, but the pipeline of new rooms is pretty heavy, particularly in certain markets. This supply is being completed just as demand growth is slowing, so the industry is finding itself in a classic supply-demand mismatch, and with that loss of pricing flexibility.

GlobeSt.com: Do you see this trend continuing over at least the next year or so?

Muoio: As I mentioned, consumer spending on hospitality looks to resume rising amid strong job growth, lower unemployment and burgeoning wage growth.  The financial markets have settled down after the upset at the start of the year, so business travel will also likewise pick up. We do not think the cycle is over for the hotel industry, just that it is in a more mature phase. The supply is already on the way, so this will continue in coming years.

GlobeSt.com: What can the hotel sector do to combat these weakening fundamentals?

Muoio: Not panic and look for demand to pick back up amid stronger economic growth. Not sure if there is anything that can be done at this point about the supply issue.

GlobeSt.com: What else should our readers know about the hotel sector?

Muoio: Fundamentals are super healthy. Occupancies are high, room rates have shot up and together these have pushed RevPAR to robust levels. So, what we are talking about here is a downshift—not yet at this point a downturn.