A Mid-Year Update on the State of Hospitality Investment

The economy is not soaring by any means, despite 2.6 percent GDP growth, and after surviving the worst financial downturn since the great depression, most of us are quite content that it’s growing at all. But what does slow economic growth mean for hospitality investment?

Occupancy growth, rate growth, and RevPAR growth are all good signs for hotel investment given the continued low yields available from debt markets. New hotel supply, while growing, is still well within anticipated demand growth. While there are pockets of overbuilding, the industry’s supply/demand balance is in good shape when taken as a whole in the U.S.

Globally, political turmoil has also dampened investor enthusiasm, but many of the more dire predictions of economic stagnation have been well off the mark. Europe continues to heal and that recovery is a solid underpinning for overall global demand. Again, slow and steady growth has been good for hotels, and solid RevPAR growth will likely continue for the foreseeable future in Europe and the UK.


Nonetheless, many critics are pointing to the all-time high levels of the stock market, which typically precede an inevitable correction or crash. However, this misses the salient point that earnings are also at all-time highs while not in a period of extreme growth. Slow growth, which is both sustainable and predictable, means lower risk, higher investor confidence, and higher earnings multiples. Couple that with low fixed-income yields, and the stock market is arguably fairly-valued. With this backdrop of investor confidence, capital continues to flow into hotels.

What could change the state of hotel investment this time? Many hotel investors assumed that the wall of commercial mortgage-backed securities (CMBS) maturity arising this year would spur an avalanche of distressed deals. Although opportunities have surfaced from this arena, these deals have been nowhere near as numerous as predicted. Moreover, the attractive debt yields and stable operating environment have made refinancing an attractive alternative to selling. Consequently, we have heard many complaints about the dearth of good investment opportunities. This phenomenon has forced investors to spread their nets wider and will clearly benefit sellers in secondary markets.

Assuming they can find an opportunity, the biggest risk for hotel investors right now would be a rapidly accelerating economy, which would force the FED to raise interest rates and, in turn, increase hotel borrowing costs. The double whammy of the resulting economic contraction coupled with higher rates could quickly put a hotel upside down on debt service coverage. Fortunately, the lending markets continue to show discipline and acquisitions are being financed conservatively. Spectacular returns are certainly hard to find, but solid returns are still quite achievable for hotel investors.


About the Author
Steve Cesinger is a co-founder and managing partner of Valor Hospitality Partners.

Previous articleCost Controls Drove Hotels’ Profit Growth in 2016
Next articleIHG Launches Virtual Reality Marketing in Sports Illustrated