FITCH: U.S. Lodging Cycle Entering the ‘Twilight Zone’

Sixty-four months into this recovery as of December 2015, the U.S. lodging cycle entered a twilight zone—an intermediate, unsettled, and often confounding area that straddles the end of expansion and the beginning of contraction. Here, healthy economic trends and hospitality fundamentals unnaturally coincide with weak hotel stock prices, modest guidance cuts, and geopolitical instability, which have reduced investor confidence. According to a new Fitch Ratings report, cumulative trailing-12 month (TTM) RevPAR has increased by 48 percent from its February 2010 trough, exceeding the 38 percent early 2000s RevPAR recovery and matching the early 1990s in a little over half the time.

Fitch does not expect the upcycle to unravel in the near term, absent an unanticipated recession or geopolitical event that reduces travel demand. Most macroeconomic trends and hotel industry fundamentals remain at ‘expansionary’ absolute levels; however, momentum is waning. Fitch’s 4 percent to 6 percent 2016 U.S. RevPAR growth projection range implies solid growth, but the mid-point is roughly 100 basis points (bp) below many popular industry forecasts.

Most early warning RevPAR trend indicators Fitch tracks weakened during fourth-quarter 2015: Hotel REIT shares fell, leading economic indicators lost momentum, and industry occupancy decelerated. The flattening yield curve arguably increases the recession odds, although Fitch’s base case sees modest economic growth through 2017.

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Fitch expects 2.5 percent and 2.3 percent U.S. GDP forecasts for 2016 and 2017, respectively, driven by 5 percent and 4.3 percent growth in the investment subcomponent, which has the strongest correlation to lodging demand. Unemployment is low and below its TTM average, but declining labor force participation and underemployment concerns linger. The 10-year U.S. Treasury rate has crossed above and consumer sentiment below their respective TTM averages. The U.S. dollar made a new recent high against a blended average of major world currencies during November, making better inbound visitation trends less likely next year.

Supply grew by 1.1 percent for the TTM ended November 2015 (latest available)—well below its 1.9 percent average since 1988. However, growth accelerated to 1.4% during the month, helped by real ADRs that now exceed their prior peak. The October Fed Loan Officer survey showed net loosening for CRE underwriting standards, including development loans. The U.S. hotel room pipeline is roughly 30 percent below the 2008 peak, but the under-construction and final planning categories combined are only 3,000 rooms below the prior peak.