IRVINE, CA—Ten-X's recent hotel monitor report observed what is most remarkable is that the US economy has yet to fully recover from the Great Recession of 2008, yet its growth has been slow and steady. While this economic expansion continues on, there are multiple headwinds that are causing it to sputter. Precarious footing in Europe and Asia is causing currents throughout the international community. Adding in the Brexit kerfuffle and the uncertainty that always accompanies US elections gives an air of unrest in the global markets.
Despite all of this, business travel continues to rise, although at a much more moderate pace. According to the US Travel Association's forecast, total domestic business travel shows growth of only 0.6% this year, a stark contrast from last year's growth of 1.9%. The Association predicts business travel to accelerate to slightly less than 1% in 2017, before growth plateaus at a rate of 1% per year during the years 2018 to 2020. That growth rate remains slower than that of 2013 to 2015.
Furthermore, the average daily rate expanded just 0.4% year over year in the luxury segment, by far the worst performance across all chain types. And, RevPAR rebounded after a decline in the first quarter, increasing by a seasonally adjusted 2% in the second quarter, according to STR Data. Although RevPAR is now 3.5% higher than a year ago, it is still a marked deceleration from its growth earlier in the cycle. Meanwhile, the aforementioned luxury chain segment was once again slower than expected, with RevPAR expanding the same as ADR, at 0.4% from a year ago.
What does all of that mean for transaction volume? The second quarter deal volume of $6.5 billion is up 5.5% from the first quarter but that is a decrease of 50% from a year ago, and less than half the level of the fourth quarter of 2015. The decline in deal volume was felt more deeply in the full-service sector than in limited service, says Ten-X's quarterly hotel monitor. Falor says the activity really began to plateau in the first quarter of 2015, then a widening gap began between the bid and ask spread.
“Transaction volume has been affected since last year,” says Falor, “with a noticeable decrease in portfolio activity. The first half of the year, there was a decrease of 51%. This can be attributed to a loss in purchases by REITS as they sought out other internal strategies. Also, there is an uncertainty in major markets, such as San Francisco, New York and Miami, where rates have declined. Finally, the strength of the dollar hurts travel into the US.”
The softness in international demand that Falor mentioned will be felt more acutely in gateway trophy markets such as New York City, Washington DC, Miami, Los Angeles, Orlando and San Francisco, which garner much of the flows of international tourism. This will be exacerbated by the fact that many of these markets face larger new development pipelines, which will depress fundamentals further.
The average price per key increased 20% in the second quarter to $159,000. Again, this is a 4% decrease from a year ago. Limited service hotel pricing is actually up 13% year over year, after a gain of 6% in the quarter. Full-service pricing has decreased more than 11% from its level last year, despite a 27% bump from the first quarter.
Second quarter cap rates remained flat from the previous quarter at 8.5%, now 30 basis points higher than a year ago. Limited-service cap rates remained stable at 8.75% and are only 10 to 20 basis points higher than a year ago, while full-service cap rates are up 50 basis points from a year ago at 8%.
“We anticipate volume picking up in the near future with more realistic values from the buy/sell side,” says Falor. According to Ten-X Research, current buy markets are Atlanta; Las Vegas; Jacksonville, FL; Sacramento; and Los Angeles.
IRVINE, CA—Ten-X's recent hotel monitor report observed what is most remarkable is that the US economy has yet to fully recover from the Great Recession of 2008, yet its growth has been slow and steady. While this economic expansion continues on, there are multiple headwinds that are causing it to sputter. Precarious footing in Europe and Asia is causing currents throughout the international community. Adding in the Brexit kerfuffle and the uncertainty that always accompanies US elections gives an air of unrest in the global markets.
Despite all of this, business travel continues to rise, although at a much more moderate pace. According to the US Travel Association's forecast, total domestic business travel shows growth of only 0.6% this year, a stark contrast from last year's growth of 1.9%. The Association predicts business travel to accelerate to slightly less than 1% in 2017, before growth plateaus at a rate of 1% per year during the years 2018 to 2020. That growth rate remains slower than that of 2013 to 2015.
Furthermore, the average daily rate expanded just 0.4% year over year in the luxury segment, by far the worst performance across all chain types. And, RevPAR rebounded after a decline in the first quarter, increasing by a seasonally adjusted 2% in the second quarter, according to STR Data. Although RevPAR is now 3.5% higher than a year ago, it is still a marked deceleration from its growth earlier in the cycle. Meanwhile, the aforementioned luxury chain segment was once again slower than expected, with RevPAR expanding the same as ADR, at 0.4% from a year ago.
What does all of that mean for transaction volume? The second quarter deal volume of $6.5 billion is up 5.5% from the first quarter but that is a decrease of 50% from a year ago, and less than half the level of the fourth quarter of 2015. The decline in deal volume was felt more deeply in the full-service sector than in limited service, says Ten-X's quarterly hotel monitor. Falor says the activity really began to plateau in the first quarter of 2015, then a widening gap began between the bid and ask spread.
“Transaction volume has been affected since last year,” says Falor, “with a noticeable decrease in portfolio activity. The first half of the year, there was a decrease of 51%. This can be attributed to a loss in purchases by REITS as they sought out other internal strategies. Also, there is an uncertainty in major markets, such as San Francisco,
The softness in international demand that Falor mentioned will be felt more acutely in gateway trophy markets such as
The average price per key increased 20% in the second quarter to $159,000. Again, this is a 4% decrease from a year ago. Limited service hotel pricing is actually up 13% year over year, after a gain of 6% in the quarter. Full-service pricing has decreased more than 11% from its level last year, despite a 27% bump from the first quarter.
Second quarter cap rates remained flat from the previous quarter at 8.5%, now 30 basis points higher than a year ago. Limited-service cap rates remained stable at 8.75% and are only 10 to 20 basis points higher than a year ago, while full-service cap rates are up 50 basis points from a year ago at 8%.
“We anticipate volume picking up in the near future with more realistic values from the buy/sell side,” says Falor. According to Ten-X Research, current buy markets are Atlanta; Las Vegas; Jacksonville, FL; Sacramento; and Los Angeles.
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