The lodging industry might be experiencing slower growth this year, but the general consensus at the sold-out Lodging Conference in Phoenix this week is that fundamentals will remain solid. In the words of Tom Corcoron, chairman of the board at FelCor Lodging Trust, the next 12 to 24 months will be fairly “steady Eddie.”
While uncertainty looms due to a variety of factors, including Brexit, Zika, the presidential election, and threats of terrorism, the industry continues to break records in occupancy and average daily rate and RevPAR has grown for 78 straight months, according to Steve Hennis, VP of consulting and analytics at STR. In fact, July 2016 experienced the most demand ever in one month, and profits are at near-record levels.
Supply might be impacting some markets, such as Houston and New York City, but growth is still relatively low when considering the big picture. “In itself, supply is not really the issue that will cause us to have a massive downturn,” Hennis said. “It’s just the timing of that supply we’ve seen over time that has really been an issue.”
“We’re operating at a very high level,” added Mark Woodworth, senior managing director at CBRE. “Our expectation is that, absent of things one can’t predict, we should continue to perform at that high level for a protracted period of time.”
But with a pull-back in CMBS activity, REITs and institutional investors moving to the sidelines, and investors underwriting deals a lot more conservatively than in the past, transaction volume in the U.S. is down 52 percent, said Adam Lair, managing director at HVS. “We’ve had this dramatic dislocation between the transaction market and what’s actually going on in underlying hotel fundamentals.”
As long as the REITs are trading below asset value, they will likely continue to sell hotels and buy back stock, because of the better return to shareholders, FelCor’s Corcoran said during the Lodging Leaders panel. “I think we’re in a phase of the industry right now where we’ve got good growth above GDP, for an industry that continues to have demand.”
With the Marriott-Starwood mega-merger officially complete and Red Lion’s recently announced plans to acquire Vantage Hospitality, the wave of consolidation in the industry was a hot topic among panelists. Vantage CEO Roger Bloss cited the need for a robust technology platform as a major reason why the company agreed to the acquisition. “We were always a technology user, but we were never a technology leader, and that was a big issue for me,” he said. Red Lion’s approach to tech is “futuristic” yet grounded enough that hoteliers feel comfortable with it, he added.
Jim Abrahamson, CEO of Interstate Hotels & Resorts, believes this period of M&A frenzy will continue. Growth isn’t going to come as easy, he explained, and companies that take advantage of scale can manufacture better performance for owners. “If you look at our history, and look at the industry, I think there is no question there is going to be more consolidation,” he said. “The capital markets are one thing, but also investors are looking for how do you grow earnings right now. It’s going to come through synergies and shared opportunities.”