Fitch: U.S. Lodging in Twilight of Latest Upcycle

NEW YORK—The U.S. lodging industry is in the twilight of the current upcycle, according to Fitch Ratings. The recovery is now the second longest on record, with trailing 12-month (TTM) RevPAR positive for 68 consecutive months. Fitch is not forecasting a U.S. recession through at least 2017 and it would be unprecedented for lodging to enter a downturn without one.

Fitch expects RevPAR to accelerate modestly during the remainder of the year from an unusually weak first quarter. However, lodging fundamentals are softening and RevPAR growth is decelerating, with 2016 likely to come in at (or possibly below) the low end of the company’s 4 percent to 5 percent estimate. Supply is growing, but restrained by available capital.

The index of leading economic indicators has weakened since January, but remains at a positive level that is somewhat inconsistent with the deceleration in lodging demand. The nascent rally in hotel REIT shares that began in late February took a step back in April. TTM hotel occupancy continues to decelerate and will likely turn negative this year. Declines in year-over-year TTM occupancy have occurred four times since 1988—three of these instances foreshadowed negative TTM RevPAR within roughly six to 24 months.

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Key economic indicators that correlate with lodging demand remain healthy, but have generally lost momentum for further improvement. GDP growth is positive, helped by solid consumer spending and fixed investment trends, which are offsetting dollar-related export softness. Fitch lowered its 2016 U.S. GDP forecast to 2.1 percent in March from 2.5 percent at Dec. 31, 2015. The 10-year U.S. Treasury rate has remained below 2 percent since January, consumer confidence is healthy and unemployment low. Inbound U.S. visitation trends should benefit from U.S. dollar stability and Fitch’s expectation for a subdued, cyclical, eurozone recovery.

The real ADR recovery has improved hotel development feasibility and led to an increase in activity. Supply growth has averaged 1.5 percent this year through March. Growth was 1.8 percent in the top 25 markets during the same period, which is contributing to the weak performance of many hotel REITs with portfolio overweight in these markets. Banks are tightening lending standards, which is tempering new supply. The Fed’s April Senior Loan Officer Opinion Survey on Bank Lending Practices showed another sequential increase in the net percentage of banks tightening underwriting standards for all non-farm non-residential and land and construction commercial real estate loans.