CHICAGO-The current year is shaping up as a positive one for the hotel sector, with steady if not surging economic growth supporting new records in revenue and room nights. In turn, the rebounding fundamentals are helping drive acceleration in sales of lodging properties. So says Gregory LaBerge, national director of Marcus & Millichap‘s National Hospitality Group, in the firm’s third-quarter report on the sector.
“Room demand is growing, but is leveling off after unprecedented gains over the past two years and will continue to moderate until economic growth shifts into a higher gear,” LaBerge writes. Nonetheless, he notes that hotels saw a steady flow of customers during the first seven months of 2013, lifting occupancy 100 basis points to 63.2% during the period. Revenues reached a record $71 billion in the first seven months of the year.
In the meantime, supply growth has been subdued for the year thus far, rising only 0.8%. At the end of July, though, “more than 75,000 rooms were under construction in the US, an increase of 23 percent from one year earlier,” LaBerge writes. “Projects underway, however, represent a manageable 1.5% of existing stock.”
That being said, LaBerge observes that in view of the hotel industry’s penchant for overbuilding, the recent increase in construction projects underway in some markets and chain scales bears watching. “Some oil and gas markets, and upscale chains in particular, bear a higher risk of overdevelopment,” he writes.
That risk is self-correcting to some extent, however. Outside of a few states, “construction lenders are generally choosing well-sponsored properties and chain scales that meet under-served demand in a market and are forsaking projects where demand does not justify additional supply,” writes LaBerge.
Aside from the multifamily sector, hotel operations are outperforming all other commercial property types. That means they’re commanding attention from “a wide range of investors,” according to the Marcus & Millichap report. Among them are dedicated hotel operators seeking to expand their holdings, crossover capital from other commercial property sectors and other franchise businesses and first-time buyers.
The flow of capital into hotels drove up transaction and dollar volume over the past 12 months, “and is sustaining a liquid transaction market,” writes LaBerge. In particular, sales of upper-upscale assets surged over the past year, while dollar volume increased nearly 70% in this category as several transactions topped $100 million.
Yet the rising tide has lifted more than the most luxurious boats. “Increases in transactions were recorded across all chain scales, while independent hotels are also drawing interest from investors seeking to renovate or reposition assets in order to receive a brand affiliation,” LaBerge writes. “Acquisition financing has normalized after a brief pause by lenders following the initial rise in 10-year rates late in the second quarter, and competition among debt providers is intense.”
As a mark of the sector’s relative good health, Fitch Ratings said last week that hotel’s CMBS delinquency rate for August represented the steepest one-month decline—36 basis points, from 8.04% in July to 7.68% last month—of any property sector. This was driven by the resolution of the $103-million loan on the Shore Club in Miami Beach, securitized as JPMCC 2005-CIBC13. The borrower redeemed a foreclosure judgment on June 25 and paid off the loan in full in early July.